Jargon buster

Interest is money that you earn on your savings. The amount you get from an account will be shown as a percentage. The higher the percentage, the more interest you get. It is worked out as a proportion of your savings, so putting more money in the account means you’ll get more interest.

AER (Annual Equivalent Rate) helps you compare rates across different accounts.

A higher AER means you get more interest paid to you overall. This number is different to the interest rate because it also takes into consideration how often you get paid the interest.

For example, if an account pays 4% interest but as 2% every six months rather than one payment at the end of year, you will earn more. That’s because when the first interest payment is added to the account, your total savings are higher when the second interest payment is worked out. In other words, the interest you have already been paid will itself earn interest as part of your savings pot.

The AER for these accounts will be higher to show this.

Compound interest is when you are paid interest on interest you’ve already earned. Let’s say you earn £20 of interest on your savings. That will be added to your account and next time you’ll earn interest on the total you have in the account, including that £20. This means your savings grow a little faster.

Gross interest means the amount of interest you earn before tax is taken off. Net interest is the rate of interest you earn after tax has been paid. It is the net interest which is the amount of money you will actually earn. Unless you have a high salary or have a lot of savings it is unlikely that you will need to pay any tax on the interest you earn. See our Frequently Asked Questions.

If you have a savings account which has a variable rate of interest, it can go up or down while you have the account. If you have a savings account which has a fixed rate of interest it will stay the same for a period of time. Companies offering accounts have to be clear with you about how long that time period will be.

The amount that you earn is worked out each month based on the interest rate on your account and how much money you have in savings at that time. This means that as the amount of money in your account changes, so does the amount of interest that you earn. If the interest rate stays the same but you are adding to your savings each month, the amount of interest paid to you will go up.

If your interest rate is 2%, it doesn’t mean that the total you’ll receive will be 2% of what you have at the end of the year in interest. That’s because the interest is worked out each month and in the earlier months you had less savings and therefore you earned less interest.