We understand you want to make the most of your cash savings, and it’s important to know how interest works.
Here are two key terms to help clarify:
Gross rate is the rate of interest each bank uses to calculate and pay without tax taken off.
AER (Annual Equivalent Rate) illustrates what the interest rate would be if it was paid and compounded once per year.
While these rates are useful for comparing accounts, they don’t always reflect the exact cash amount you’ll receive. Because interest timing and compounding vary by product, trying to calculate your own interest using AER or Gross Rate is not recommended as it can be confusing.
For illustrative purposes, the table below shows how £100 grows at a 5% Gross Rate depending on how often interest is compounded – annually, monthly, or daily. As you’ll see, the amount of interest earned varies slightly with each compounding method , and this difference is what the AER reflects, assuming a full year of interest.
Calculation frequency | Gross rate | AER | Compounded interest at 6 months | Compounded interest at 12 months | Final amount after 12 months |
Annually | 5.00% | 5.00% | £2.47 | £5.00 | £105.00 |
Monthly | 5.00% | 5.12% | £2.53 | £5.12 | £105.12 |
Daily | 5.00% | 5.13% | £2.53 | £5.13 | £105.13 |
Note: If you’re receiving a Prosper boost, please bear in mind that this will be paid separately by Prosper into your nominated bank account up to a week after the maturity date of your product. This payment is treated as a cashback reward rather than interest, and is therefore not currently considered taxable income by HMRC.