UK Compound Interest Calculator

How Compound Interest Works

Simple interest pays only on your original deposit. Compound interest pays on the deposit plus every bit of interest already earned, so growth accelerates over time:

where P is the deposit, r is the annual rate as a decimal, n is the number of compounding periods per year, and t is the years.

Working example: £5,000 at 4% compounded monthly for 10 years is 5,000 × (1 + 0.04 ÷ 12)^120 = £7,454. Simple interest would have paid £2,000; compounding added £454 more purely from interest-on-interest, and that gap widens every extra year you leave it.

The Rule of 72 gives a quick mental check: divide 72 by the rate to estimate the doubling time. At 4%, money doubles in about 18 years, and at 6% in about 12. You can project equity growth using our Investment Growth Calculator or regular contributions using our SIP Calculator.

AER: The Number That Lets You Compare Accounts

UK savings accounts must quote an AER (Annual Equivalent Rate), which shows what a rate delivers over a year once the compounding frequency is included. A gross rate of 3.93% compounded monthly works out at 4.00% AER. Always compare accounts on AER, since a slightly lower headline rate compounding more often can beat a higher one compounding annually. Fixed-rate bonds that pay interest only at maturity effectively compound annually, which the AER also reflects.

Adding Monthly Savings

Regular deposits transform the maths because every contribution starts its own compounding clock. A £150 monthly savings plan at 4% AER grows to roughly £19,700 in 10 years and £54,800 in 25 years, of which £9,800 is pure interest. The pattern to notice: in the early years your deposits do most of the work, but given enough time, the interest earned each year overtakes what you are putting in. That crossover is the practical payoff of starting early.

Tax on Your Interest

Interest outside an ISA counts as taxable income. The Personal Savings Allowance lets basic-rate taxpayers earn £1,000 of interest tax-free each year and higher-rate taxpayers £500, while additional-rate taxpayers get none. At 4%, a basic-rate taxpayer breaches the allowance with around £25,000 in savings—a threshold far more people now cross than in near-zero rate years. Cash ISAs shelter interest completely within the overall £20,000 annual ISA allowance, so larger balances usually belong there first.

One quirk worth knowing: on fixed bonds where interest is only accessible at maturity, HMRC taxes it all in the year it becomes available, which can breach your allowance in a single year even though it accrued across several.

Compound Interest Working Against You

The same force powers debt. Credit cards compound daily or monthly at APRs far above savings rates, which is why a balance left at 24% APR doubles in roughly three years untouched. The order of operations for most households: clear expensive compounding debt first, since no savings account outruns it. You can calculate other potential investment taxes using our Capital Gains Tax Calculator or Dividend Tax Calculator.