Published: 06/12/2018

At a glance

  • The Annual Equivalent Rate (AER) is the interest rate most often used for comparisons as it shows you how much interest you will earn over the course of a year taking into account bonuses, compounding and charges. 
  • Gross rate is the rate of interest that you would earn at the outset of taking out a savings account.
  • Net rate is the rate of interest you receive on a savings account after tax (specifically after basic rate tax of 20%)

Thinking you fully understand a financial concept when you actually don't can have expensive consequences – it may end up costing you money or make you lose out on earnings. When it comes to savings, the most important concepts to get straight are the Annual Equivalent Rate (AER), gross rate and net rate.

These three terms have been a part of the savings landscape for a long time and were once displayed on virtually every savings account in the market. Net rate may not be as familiar to you now since banks and building societies pay interest without tax being deducted, but it's important to know what each of these terms means, and more importantly, how you can use them to compare different accounts.

To get them straight once and for all, this comparison table should help:

 

AER

Gross rate

Net rate

Does this interest rate take into account any income tax I may need to pay?

No

No. Since 6 April 2016 savings interest is paid gross. Every basic rate taxpayer now has an annual Personal Savings Allowance that means they can earn up to £1,000 in interest without paying tax on it. Higher rate taxpayers have a £500 allowance. If you earn more than your allowance, you must declare it to HMRC (the net rate will also be important to you)

The net rate is the rate of interest you receive after tax if you need to pay tax on your interest

Can I use this rate to easily compare an account that pays monthly interest with an account that pays yearly interest?

Yes

No

No

Can I use this interest rate to compare a normal savings account with a cash ISA?

No, as the AER doesn't take any income tax you have to pay into account

Yes, but be careful if you breach your Personal Savings Allowance as you will need to pay tax on some of your interest and it won't be a fair comparison

Possibly. If you pay tax on your savings, you could compare the net rate on a normal savings account with the gross rate on a cash ISA (although this won't work if one of the accounts has an introductory bonus of less than one year, or has a different interest payment frequency, e.g. monthly or yearly)

What if the savings account offers an introductory bonus – does the rate include this?

Yes

Yes

Yes

If the introductory bonus lasts less than one year, does the rate show what happens when this ends?

Yes. An AER shows the rate of interest you would earn if you kept your savings in the account for a full year. Where an introductory bonus is for less than a year, the AER shows the effect of the bonus for the whole year – including any period after the bonus finishes

No. A gross rate only shows what you would earn at the outset – with the bonus

No. A net rate only shows what you would earn at the outset – with the bonus

Does the rate show what the real return on my savings is, after inflation?

No

No

No

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

couple looking at personal finances

At a glance

  • The Annual Equivalent Rate (AER) is the interest rate most often used for comparisons as it shows you how much interest you will earn over the course of a year taking into account bonuses, compounding and charges. 
  • Gross rate is the rate of interest that you would earn at the outset of taking out a savings account.
  • Net rate is the rate of interest you receive on a savings account after tax (specifically after basic rate tax of 20%)

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