What is AER?

Why AER exists

Before it, providers could quote whichever convention flattered their product. An account paying 4.80% monthly and one paying 4.85% annually were near-impossible to compare without doing the arithmetic yourself.

AER standardises that. It answers one question for every account, the same way: what percentage would I have earned after a full year, if I left the interest alone?

AER = (1 + r ÷ n)^n − 1

Gross rate versus AER

The gross rate is the headline before compounding. AER is what a year returns.

Which is why comparing gross rates across accounts with different payment frequencies is a mistake, and comparing AERs is not. Use the APY calculator — APY and AER are the same computation — to convert a gross rate to its AER.

What to check besides the AER

Is it variable? Almost every easy-access savings rate is. Providers can reduce it whenever they choose, and typically do when the Bank of England cuts Bank Rate. A market-leading rate is a snapshot, not a commitment.

Is there a bonus? Many accounts include an introductory bonus for the first 12 months, after which the rate drops sharply. The AER quoted usually includes the bonus. Diarise the date it ends.

Are there withdrawal restrictions? Some accounts limit you to a set number of withdrawals a year, or pay a lower rate in any month you withdraw. Notice accounts require 30, 60 or 95 days' warning.

Is there a balance cap? Some of the highest rates apply only up to a few thousand pounds, with a much lower rate above it — so your blended return is well below the headline.

Is it FSCS protected? Check the provider is authorised and covered — see FSCS protection.

Tax on savings interest

Interest is generally paid gross, without tax deducted. Whether you owe any depends on your Personal Savings Allowance and your income tax band, and the allowance differs between basic-rate, higher-rate and additional-rate taxpayers.

Interest earned inside a cash ISA is not taxed and does not use your Personal Savings Allowance. Whether an ISA beats a higher-rate taxable account depends on your tax position and how much interest you are earning — a taxable account paying more can still be better if your allowance covers the interest.

Our calculators show pre-tax figures. Check the current allowances on GOV.UK before assuming a projection is what you keep.

Fixed-rate bonds

A fixed-rate bond locks the AER for a set term — one, two, three or five years. In exchange, you generally cannot access the money before the end without penalty, and sometimes not at all.

The trade is rate certainty against liquidity. Money you might need without warning belongs in easy access even at a lower rate; money with a known date attached can take the fixed rate.