What is AER? Savings interest explained simply

What AER means

AER is the yearly interest rate on a savings account, worked out as if interest were added and then left to earn interest of its own. Every UK savings provider quotes it the same way, which is the whole point: it lets you compare accounts fairly.

Without AER, comparing accounts would be harder than it needs to be. One account might pay interest every month, another once a year, a third every quarter. Paying monthly is slightly better for you, because each month’s interest earns a little interest itself for the rest of the year. AER builds that effect into a single annual figure, so a monthly payer and an annual payer can be lined up side by side.

AER is usually shown with a word in brackets after it: variable, fixed or tracker. That tells you whether the rate can change and why. On app pages you will also often see a headline AER that includes a temporary boost, which is the single biggest thing to check before you compare.

AER vs the gross rate

The gross rate is the simple annual rate of interest before compounding and before any tax. If an account pays interest once a year, the gross rate and the AER are identical. If it pays monthly, the gross rate is a little lower than the AER, because the AER counts the interest earned on interest.

“Gross” also means no tax has been taken off. In the UK, banks pay savings interest without deducting tax. Most people pay no tax on it at all, thanks to the Personal Savings Allowance: up to £1,000 of interest a year for basic-rate taxpayers and £500 for higher-rate taxpayers, according to GOV.UK’s guide to tax on savings interest. Interest inside a Cash ISA is tax-free regardless, which our Cash ISA allowance guide covers.

You may also see “net”, which once meant the rate after basic-rate tax. Since banks stopped deducting tax automatically, net rates are rarely quoted for ordinary savings.

Worked example: monthly vs annual interest

Here is how the same gross rate produces two different AERs, depending on how often interest is paid. Imagine £10,000 left untouched for a year in two accounts, both with a gross rate of 4.00%. These are example figures, not any provider’s current rate.

Account B pays about £33.33 in its first month. In month two, the balance is slightly higher, so the interest is slightly higher, and so on. Over the year that adds up to £7.42 more than Account A, which is why its AER is higher even though the gross rates match.

Turn it around and the AER makes life simpler. If Account A advertised 4.00% AER and a monthly-paying account wanted to match it, the monthly account would only need a gross rate of about 3.93%. Both would pay the same over a year. Comparing on AER means you never need to do this sum yourself.

Tracker, variable and fixed rates

Variable means the provider can change the rate, usually with notice. Most easy access accounts are variable. Fixed means the rate is locked for a set term, often one or two years, and in exchange you usually cannot withdraw until the end. Tracker is a type of variable rate that is set a fixed distance from another rate, almost always the Bank of England’s Bank Rate.

Bank Rate is currently 3.75%. A tracker set, say, half a point below it would rise by a quarter of a point if Bank Rate rose by a quarter, and fall by the same amount if Bank Rate fell. That is predictable in one sense: you know the gap will stay the same. It is unpredictable in another, because nobody knows where Bank Rate will go next. We post a dated entry in savings news after each Bank Rate decision that moves app rates.

How Chip quotes its rates: AER and gross

Chip’s savings accounts are a good real-world example, because Chip quotes both AER and gross figures and its rates are trackers. Each account page says how far its standard rate sits below Bank Rate. Those gaps are gross figures, so you cannot simply subtract them from Bank Rate and expect to get the AER.

The gross figures above are our own conversions, assuming interest is paid monthly. Chip says the Instant Access rate tracks 0.79% under the Bank of England base rate, and for the Easy Access Saver and Smart Cash ISA, it says each rate tracks 0.30% under the Bank of England base rate. Take each gap away from Bank Rate and you land on the gross figure, not the AER. The AER is a touch higher because of monthly compounding.

Chip’s Easy Access page shows the same thing for its boost, describing the headline as “Comprised of an underlying standard AER of 3.50% … plus a 0.31% AER (0.30% gross) new customer boost applied for 12 months”. The boost is a slightly different number depending on whether it is quoted as AER or gross. When you are comparing, always use the AER figures, which is what Chip’s headlines and our Chip interest rates page use.

How boosts are quoted

Many app headlines are a standard rate plus a temporary new-customer boost, added together. Chip’s Instant Access headline is 3.51% AER (variable tracker), which Chip describes as “Made up of a 3.00% standard variable rate, plus a 0.51% new customer boost for 12 months”. Its Smart Cash ISA headline is 4.68% AER (variable tracker) for 12 months, then 3.50% AER.

The AER of a boosted account is still a true AER, but only for the length of the boost. In year two, the AER that applies is the standard one. If you are planning to keep money somewhere for more than a year, the standard rate is the number that matters most. Our guide to introductory bonus rates explains how to find it and what to do when the boost ends.

What AER does not tell you

AER is a fair yardstick, but it describes a tidy situation that real savings rarely match: one balance, left alone for exactly a year, at a rate that never changes. Keep these gaps in mind.

• Your balance moves. If you pay in monthly or take money out, you earn interest on a changing balance. Interest is usually worked out daily, so money added halfway through the year earns roughly half a year’s interest.
• Variable rates change. A variable or tracker AER is today’s rate. If Bank Rate falls, so will a tracker, and providers can change other variable rates with notice.
• Boosts end. A boosted AER only applies for the boost period. Over two years, the average is lower than the headline.
• Conditions can cut the rate. Some accounts drop to a lower rate if you make too many withdrawals or your balance falls below a minimum. The AER assumes you keep to the rules.
• Fees are not included. If an app only pays its best rate on a paid plan, the AER does not take the subscription into account. You have to subtract that yourself.
• Tax is not included. AER is a pre-tax figure. Most people pay no tax on savings interest, but if you are above your Personal Savings Allowance, a Cash ISA paying a slightly lower AER can leave you better off.

For fixed-term accounts that pay all the interest at the end, the AER still works the same way: it shows the equivalent annual rate, so a two-year fix can be compared with a one-year fix or an easy access account. Just remember that with a fix you usually cannot get at the money until the term ends.

How to compare savings accounts properly

AER gets you halfway. To compare two accounts fairly, work through these in order:

1. Compare AER, not gross. It is the only figure built the same way everywhere.
2. Split the headline. Find the standard rate and the boost length, and judge the account on the standard rate if you will stay beyond the boost.
3. Check the access rules. Some accounts cut the rate after a set number of withdrawals. Chip’s Instant Access vs Easy Access comparison shows how much that can matter.
4. Check fees. Some apps pay their best rate only on a paid plan. A subscription can outweigh the extra interest on a smaller balance.
5. Check who holds the money. The FSCS limit applies per bank, not per app, as our guide to FSCS protection with savings apps explains.
6. Run your own numbers. The savings interest calculator shows what a balance earns over two years, including the drop when a boost ends.

For side-by-side figures across providers, see the best savings apps comparison, which lists each headline rate alongside its standard rate and conditions.