Gross interest
When choosing a savings account, you’ll want to earn as much interest on your deposits as possible. Understanding the different types of interest rates and what they mean for your savings will help you effectively compare savings account rates and maximise the return on your savings account deposits. On this page, we’ll explain what gross interest is, and the difference between gross interest, net interest and the Annual Equivalent Rate (AER).
Gross interest definition: Gross interest is the annual rate of interest you’ll receive on your savings or investment before any tax is deducted (if applicable)
Calculation: You can work out gross interest using a simple formula and multiplication
Gross interest vs. AER: Despite sometimes looking similar, gross interest differs from the AER
What is gross interest?
Expressed as a percentage, gross interest is the annual rate of interest you’ll be paid on a deposit, security or investment account. The gross interest figure you’ll see is before the deduction of any taxes or charges. Gross interest is always higher than net interest, because net interest is the amount you’ll receive after deductions.
Gross interest is usually the headline interest rate attached to a:
- Loan
- Fixed-income security
What does gross interest mean?
Interest is either what you earn from your savings or what you’re charged on money you’ve borrowed. Interest rates are typically expressed as an annual percentage.
The gross interest rate is the annual rate of interest you earn from an investment or savings account before tax or other bank charges are deducted.
What's the difference between gross and net savings interest?
Net savings interest is the interest you’ll earn after tax is deducted from the gross interest rate. That’s the difference; the gross interest rate doesn’t consider any tax you may need to pay on your savings, while the net savings interest rate is that gross rate with the tax removed.
Is UK bank interest paid net or gross?
Since the introduction of a personal allowance (the amount you can earn tax-free each year) in 2016, UK banks and building societies have been paying interest gross, without income tax deducted.
How to calculate gross interest
You can calculate gross interest income by multiplying the principal amount by the rate of interest over a set period of time.
To complete this calculation, you’ll first need to decimalise the rate of interest. For example, if the rate of interest is 2%, divide that by 100 to get the decimal figure of 0.02.
You then need to take into account the length of time that interest will be accruing, i.e. the number of years you’ll be saving for. Multiply the rate of interest by the number of years. For example, 0.02 x 5 years is 0.1.
Finally, use that figure to complete the calculation. Let’s say you borrow £5,000. Multiply that amount by 0.1, which gives you 500. This means that the gross interest income you’ll receive over five years is £500.
The same calculation applies whether you’re saving or borrowing.
How does tax affect the gross interest rate?
Tax isn’t factored into the gross interest rate, but it is factored into the net savings interest rate, which deducts what you would need to pay in tax.
What’s the difference between AER and gross interest?
No, the gross interest rate and AER aren’t the same, but they can look the same. Gross interest is the rate you’ll earn when you first open a savings account. AER shows how much interest you’ll earn over the course of a whole year. The percentage could look the same, but the actual amount of interest you’ll earn will be different.
The AER makes it easier to compare the interest rates of savings accounts offered by different financial institutions because it takes compound interest into account. The gross interest rate doesn’t take compound interest into account and is just a flat rate of interest.
It is important to keep in mind that although they may seem similar, you should always compare like for like rather than comparing gross interest and AER against each other.
Compare interest rates in the Raisin UK marketplace
The best interest rates in our marketplace are subject to change. Typically, longer-term fixed rate bonds offer the best rates, but notice accounts can offer competitive variable interest rates. It’s important to read the details of a savings account before opening it to ensure that as well as receiving the best interest rate, the account is right for you.