Gross savings rate vs AER: how to compare properly

Gross rate and AER describe savings interest from different angles. Gross is the stated interest rate before tax; AER standardises the return as if interest were paid and compounded once a year, making accounts with different payment frequencies easier to compare.

Use AER to compare accounts on the same basis

The FCA describes AER as the annual equivalent rate: it reflects how much a savings product would pay over a year taking compounding into account. That is useful because one account might pay monthly and another annually.

If Account A shows 4.00% AER and Account B shows 3.90% AER under comparable conditions, AER lets you see which rate is higher without manually modelling every monthly interest credit.

Gross is the rate before any tax treatment. On an account paying interest monthly, the gross monthly-credit rate can look slightly lower than the AER because AER assumes those monthly interest payments remain in the account and themselves earn interest.

Do not add gross and AER together. They are two descriptions of one interest arrangement, not two separate returns.

Do the factual check before making another move: record the AER, the gross rate, how often interest is paid, whether a bonus expires and whether withdrawals change the rate. The aim is not paperwork for its own sake. It is to stop a timing, identity or limit question from turning into a second problem because money was moved, an instruction was cancelled or evidence disappeared before the original position was understood.

Final verification for gross savings rates and AER: before you treat this step as complete, compare the provider's confirmation with the next real account event. This keeps the follow-up focused on the unresolved fact under "Use AER to compare accounts on the same basis" rather than reopening every part of the issue.

Translate the quoted rate into pounds for your balance

At 4.00% AER, £10,000 left for a full year under the stated assumptions would grow by roughly £400 to about £10,400. If you withdraw monthly interest instead of leaving it to compound, the actual annual pounds can differ from the AER illustration.

For a short holding period, your return also will not simply be “AER divided by 12” in every product. Read how the provider calculates daily/monthly interest and when it credits it.

A savings account may include a 12-month bonus, a balance tier or a condition such as limited withdrawals. The FCA summary box is meant to show these rate conditions clearly.

Compare what the account will pay after the bonus ends as well as today’s AER. A 5.0% promotional rate falling to 2.0% can be worse over two years than a stable account if you forget to move the money.

Worked example: £10,000 earning 4.00% for a full year produces about £400 before tax if the rate stays unchanged. A promotional 4.50% rate for only six months cannot be compared with a permanent 4.20% account by looking at the headline alone; calculate the return over the period you expect to hold the money. The numbers are illustrative, not a prediction of what your provider will do. Their purpose is to force the decision into pounds, dates and confirmed instructions so that a vague promise such as "it should be fine" does not become your only control.

Check bonuses, access rules and tax separately

Banks generally quote savings rates without tailoring them to your tax position. For 2026/27, the Personal Savings Allowance is up to £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and £0 for additional-rate taxpayers, subject to the wider rules.

An ISA’s interest is tax-free, so comparing a Cash ISA with a taxable saver may require looking at your after-tax return, not only the AER printed in the table.

Two accounts can show the same AER while one pays interest monthly and the other annually. If you rely on the interest as income, the monthly-payment version can be more useful even when the annual return is similar. If you leave the monthly interest in the account, compounding is what brings the return toward the stated AER.

For a £100,000 balance, even a small rate difference matters: 0.10 percentage points is about £100 over a year before tax. Compare the rate on the balance tier you will actually hold, not the rate reserved for a smaller or larger band.

Your evidence pack should include the provider's rate table, bonus-expiry date, withdrawal conditions, interest-payment frequency and the date on which you checked those figures. Put the items in date order and note which fact each one proves. This matters because a dispute is easier to resolve when the provider can see the original instruction, the actual outcome and the financial consequence without reconstructing the sequence from several phone calls.

Choose the rate structure that fits how you use the money

AER is designed to make savings accounts easier to compare on a common annual basis, but your actual interest depends on how much money is in the account and for how long. If £10,000 sat for a full year at an illustrative 4% AER with no withdrawals or rate changes, the rough annual interest is about £400 before considering your personal tax position. If the money is there for only three months, the result will be far smaller even though the advertised AER has not changed.

Gross rate and AER can differ because AER reflects compounding assumptions. When comparing accounts, also check whether the headline rate includes a temporary bonus, whether interest is paid monthly or annually, and whether withdrawal rules reduce the benefit. A slightly lower rate with unrestricted access can be more useful than a higher rate that you cannot practically use.

Use AER to compare like with like, then use pounds to make your own decision. Tax treatment and the Personal Savings Allowance are separate from the bank's quoted rate, so do not treat a gross or AER figure as a guaranteed after-tax return. The final control is verification: confirm that the account, payment or record now reflects the agreed outcome. If it does not, use the same chronology and references in a formal complaint so the second review starts with facts rather than another retelling.

Final verification for gross savings rates and AER: before you treat this step as complete, compare the provider's confirmation with the next real account event. This keeps the follow-up focused on the unresolved fact under "Choose the rate structure that fits how you use the money" rather than reopening every part of the issue. Recheck number 2 should be based on the newest statement or confirmation, not an older screenshot.

Sources and verification

• FCA - Cash savings and AER
• FCA Handbook - Savings account summary box
• GOV.UK - Tax on savings interest

MyBankAnswers uses official provider and UK regulatory sources wherever practical. Information is general and does not constitute financial advice.