What is interest?
Interest is money you earn on your savings. When you put money in a bank account, the bank uses it to lend to other people. In return, they pay you a percentage of your balance.
If you have £1,000 in an account paying 5% interest, you’ll earn roughly £50 over a year.
How is interest shown?
As a percentage, usually the AER (Annual Equivalent Rate). This tells you what you’d earn over a full year, making it easy to compare accounts.
A 5% AER means £50 a year on every £1,000 saved.
How often is interest paid?
Depends on the account. Monthly, yearly, or sometimes only when the account matures. When interest is added to your balance, you start earning interest on the interest. This is called compound interest.
Do you pay tax on interest?
Maybe. Everyone gets a Personal Savings Allowance that lets you earn some interest tax-free. Basic rate taxpayers can earn £1,000 tax-free. Higher rate taxpayers get £500.
Interest earned in a Cash ISA is always tax-free, no matter how much you earn.
Why does interest matter?
It’s how your savings grow without you doing anything. But if the interest rate is lower than inflation (how fast prices rise), your money is actually losing buying power over time. Even though the number in your account goes up.
Variable or fixed?
Interest rates can be variable (the bank can change them anytime) or fixed (guaranteed for a set period). Easy access accounts usually have variable rates. Fixed-rate accounts lock your money away but guarantee the rate.
Key points about interest
- Money you earn on savings, paid by the bank
- Shown as a percentage. Compare using AER
- Some is tax-free through the Personal Savings Allowance or Cash ISA
- Should beat inflation, or your money loses value
More information
Scrimpr links to official sources so you can verify what you’ve learned.