Every savings account in the UK is required by law to display its interest rate as an AER — Annual Equivalent Rate. The requirement was introduced by the Financial Services Authority in 1999 and is now enforced by the Financial Conduct Authority. Its purpose is straightforward: to give savers a single, standardised figure that allows fair comparison between accounts regardless of how often interest is paid.
Despite being displayed on every savings account, ISA, and fixed-rate bond in the UK, AER is widely misunderstood. This guide explains precisely what AER means, how it is calculated, how it differs from the gross rate, and how to use it to make better decisions about where to keep your savings.
What Is AER?
AER stands for Annual Equivalent Rate. It represents the interest you would earn on a savings account over one full year, assuming you leave your money in the account and do not withdraw any interest. The key feature of AER is that it accounts for compound interest — the process by which interest earns further interest over time.
All UK banks, building societies, and savings providers are legally required to display AER on every savings product. This makes AER the correct figure to use when comparing savings accounts, because it allows you to compare accounts that pay interest at different frequencies — monthly, quarterly, or annually — on a like-for-like basis.
Key Fact
AER is to savings what APR is to borrowing. APR tells you the true yearly cost of a loan or credit card. AER tells you the true yearly return on a savings account. Both are standardised figures designed to make comparison straightforward.
How Is AER Calculated?
The AER formula accounts for the frequency with which interest is paid and the effect of compounding. The formula is:
Where n is the number of times per year that interest is paid. For an account paying interest annually, n = 1, and AER equals the gross rate. For an account paying interest monthly, n = 12, and AER will be slightly higher than the gross rate because of compounding.
A practical example: an account with a gross rate of 4.89% paying interest monthly has an AER of 5.00%. The difference arises because the monthly interest payments, if left in the account, themselves earn interest during the year. The AER of 5.00% represents the total return over 12 months including that compounding effect.
AER vs Gross Rate: The Difference Explained
The gross rate is the flat annual interest rate paid on a savings account before any tax is deducted. It does not account for compounding. The AER does. When an account pays interest annually, the gross rate and AER are identical because there is no compounding within the year. When an account pays interest more frequently than annually, the AER will be higher than the gross rate.
| Interest Payment Frequency | Gross Rate | AER |
|---|---|---|
| Annually | 5.00% | 5.00% |
| Monthly | 4.89% | 5.00% |
| Quarterly | 4.91% | 5.00% |
| Daily | 4.88% | 5.00% |
All four accounts in the table above have the same AER of 5.00%, meaning they all produce the same return over a full year. The gross rates differ because the compounding frequency differs. When comparing savings accounts, always use AER rather than the gross rate to ensure a fair comparison.
AER Examples: What £1,000, £5,000 and £10,000 Earns
The following examples show how much interest you would earn at different AER rates on three common savings amounts, assuming interest is compounded annually and the money is left untouched for one year.
| Amount Saved | 3.0% AER | 4.0% AER | 5.0% AER |
|---|---|---|---|
| £1,000 | £30.00 | £40.00 | £50.00 |
| £5,000 | £150.00 | £200.00 | £250.00 |
| £10,000 | £300.00 | £400.00 | £500.00 |
Over multiple years, the compounding effect becomes more significant. £10,000 at 5.0% AER for 10 years grows to £16,289 — an increase of £6,289 compared to just £5,000 in simple interest over the same period. Use our free AER Savings Calculator to model your own figures.
Fixed AER vs Variable AER
AER can be either fixed or variable. A fixed AER is guaranteed for a set period, typically one, two, or five years. It will not change regardless of what happens to the Bank of England base rate during that period. Fixed-rate bonds and fixed-rate ISAs typically offer fixed AER.
A variable AER can change at any time, usually in response to changes in the Bank of England base rate. Easy access savings accounts and notice accounts typically offer variable AER. When the base rate rises, variable AER accounts tend to increase their rates. When the base rate falls, they tend to decrease.
In 2026, with the Bank of England base rate at 3.75%, easy access accounts are offering variable AER rates of between 3.5% and 5.0%, while one-year fixed-rate bonds are offering between 4.2% and 4.8% AER. The best rates are available through online-only banks and savings platforms.
Common AER Mistakes to Avoid
The most common mistake is comparing an AER figure from one account with a gross rate figure from another. Because AER accounts for compounding and gross rate does not, this comparison is not like-for-like. Always compare AER with AER.
A second common mistake is assuming that a higher AER always means a better account. Access restrictions matter. A fixed-rate bond offering 4.8% AER requires you to lock your money away for a year or more. An easy access account offering 4.5% AER allows you to withdraw at any time. The right choice depends on whether you can afford to lock the money away.
A third mistake is ignoring the effect of the Personal Savings Allowance. Basic-rate taxpayers can earn up to £1,000 in savings interest per year without paying tax. Higher-rate taxpayers can earn up to £500. Interest earned within a Cash ISA is entirely tax-free regardless of the amount. If your savings interest is likely to exceed your Personal Savings Allowance, a Cash ISA may be more tax-efficient despite potentially offering a slightly lower AER.
How to Use AER to Choose the Best Savings Account
When comparing savings accounts, start by establishing how long you can leave the money untouched. If you need access within the next 12 months, compare easy access accounts by AER. If you can commit the money for one to five years, compare fixed-rate bonds by AER. If you want tax-free growth, compare Cash ISAs by AER.
Within each category, the account with the highest AER will produce the greatest return, assuming all other conditions are equal. Check whether the AER is fixed or variable. Check whether there are any withdrawal restrictions or penalties. Check that the provider is covered by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 per person per institution.
Use our free Savings Interest Rate Comparison Calculator to compare the returns from different AER rates on your specific savings amount over your chosen time period.