Savings · September 2026
AER Explained: Understanding Savings Rates in the UK
FSCS protects eligible deposits up to £120,000 per person, per authorised institution.
AER explained
A plain-English UK guide to Annual Equivalent Rate, comparing savings accounts carefully, and how AER differs from APR.
Last updated: .
UK savings adverts usually show an AER next to the interest rate. This guide explains what that figure means, how it differs from a plain interest rate, how gross and net fit in, why AER helps when you compare accounts (including Cash ISAs), and how bonuses or temporary rates can mislead.
Quick answer
- AER is an annualised way to illustrate savings interest with compounding assumptions.
- Compare AER with AER; know gross vs net and tax.
- Bonuses are temporary unless the terms say otherwise.
- Cash ISA interest is tax-free within the rules; the 2026/27 allowance is £20,000.
Key decision routes
Related reading: Savings, ISAs, easy-access savings accounts, and APR explained (borrowing — different idea).
Key concepts in plain English
What AER stands for
AER means Annual Equivalent Rate. It is a notional yearly rate that illustrates the gross interest rate as if interest were paid and compounded once a year (UK Finance AER practice).
That lets you compare accounts that pay interest monthly, quarterly or yearly on a more like-for-like basis.
What AER is trying to answer
Roughly: if I left money in for a year and interest compounded as assumed, what yearly percentage return does this rate illustrate?
It is not a personalised forecast. It is not a guarantee of what you will receive if you pay in and take out during the year.
What AER is not
- Not APR (that is about the cost of borrowing — see APR explained)
- Not your tax bill
- Not FSCS protection itself — FSCS covers eligible deposits up to £120,000 per person per authorised firm from 1 December 2025 (source: FSCS); AER does not change that limit
- Not a “best account” badge
Expert note — AER vs APR
AER vs interest rate
| Term | Plain meaning | Useful for |
|---|---|---|
| Gross interest rate | Headline rate before tax; often the contractual rate for the period | Seeing the base rate the provider quotes |
| AER | Gross rate illustrated as if compounded annually | Comparing accounts with different payment frequencies |
| Tax-free rate (e.g. Cash ISA ads) | Interest not subject to income tax inside an ISA | Comparing ISAs; often shown alongside AER |
| Net rate | After tax (seen less often now; interest usually paid gross) | Rough after-tax thinking if your PSA is used up |
If interest is paid once a year with no mid-year compounding, AER and gross can match. More frequent compounding can make AER slightly higher than the quoted gross. Compare AER with AER, not AER with a random gross figure from another advert.
Gross vs net, tax context, and why AER helps
Gross vs net
Savings interest is usually paid gross — tax is not taken off at source (MoneyHelper).
You may still owe tax if interest exceeds your allowances (Personal Savings Allowance and, where it applies, the starting rate for savings). Check live amounts on GOV.UK or MoneyHelper — do not rely on remembered figures.
Net means after tax. That mental step can matter when you compare a taxable savings account with a Cash ISA. AER itself is typically shown as a gross / tax-status-aware advertising figure depending on the product.
Why AER helps compare savings and Cash ISAs
AER gives the same yardstick across easy-access, notice, fixed-term and Cash ISA products. For easy-access context, see easy-access savings accounts.
Cash ISA interest is tax-free within ISA rules. The annual ISA allowance for 2026/27 is £20,000 (MoneyHelper / GOV.UK; any future Cash ISA reforms should only be mentioned with a dated official source). More on allowances: ISAs.
AER does not tell you about access rules, notice periods or early-exit penalties. Always read the product terms.
Bonuses and temporary rates
Welcome or conditional bonuses can lift the rate for a limited period. Industry practice usually illustrates AER excluding conditional bonuses unless the advert clearly labels something like “AER including conditional bonuses” — check the current UK Finance practice note if you need the exact wording.
Variable rates can change. Fixed rates lock for a term but may restrict withdrawals.
After a bonus ends, the ongoing AER may drop — put the end date in your calendar. Compare the bonus AER for year one with the underlying AER after the bonus. Do not treat a 12-month bonus as permanent.
Worked illustrative example
Sketch 1 — payment frequency
- Account A pays interest once a year at a gross rate of 4.00% (illustrative). AER and gross look the same under a simple yearly-pay assumption.
- Account B pays interest monthly at a similar contractual gross. Because of compounding assumptions, its AER can sit slightly above that gross — even though both adverts feel “about 4%”.
Comparing AER with AER is cleaner than comparing A’s gross with B’s monthly rate.
Sketch 2 — bonus vs steady rate
- Account C shows a higher AER for 12 months because of a welcome bonus, then drops to a lower ongoing rate.
- Account D shows a lower but steadier AER with no bonus.
Year-one headlines can favour C; year-two reality may favour D (or not — it depends on the numbers). No brand names.
No “best buy”. These figures are teaching tools only.
The catch
Common mistakes
- Comparing AER on one account with gross on another
- Ignoring bonus end dates
- Assuming a higher AER always beats a Cash ISA (tax position matters — PSA and ISA allowance)
- Forgetting access rules, notice periods or fixed-term exit costs
- Spreading deposits without checking FSCS firm-pooling — eligible deposits are protected up to £120,000 per person per authorised firm from 1 December 2025 (source: FSCS)
- Chasing tiny AER differences while leaving large balances on 0% current accounts without a plan
- Treating AER as inflation-proof — real returns can still be negative after prices rise
When to check the provider and MoneyHelper
Read the provider’s key product information: AER, gross or tax-free rate, bonus conditions, access rules and FSCS status.
Use MoneyHelper for independent savings explainers and tax-on-savings summaries.
Confirm the ISA allowance and FSCS limits on GOV.UK / FSCS before large transfers.
Never withdraw cash yourself when transferring an ISA — always use your new provider’s official ISA transfer service to preserve your tax-free status.
This page is general information. For complex tax or large sums, consider regulated advice or the free guidance routes MoneyHelper signposts.
Summary / key takeaways
- AER is an annualised way to illustrate savings interest with compounding assumptions.
- Compare AER with AER; know gross vs net and tax.
- Bonuses are temporary unless the terms say otherwise.
- Cash ISA interest is tax-free within the rules; the 2026/27 allowance is £20,000.
- FSCS deposit protection is separate from the rate — £120,000 from 1 December 2025.
- Check provider documents; illustrative maths only; not advice.
- More guides: Savings, ISAs, easy-access savings, APR explained.
FAQ
Is a higher AER always better?
Not always. Access rules, notice periods, fixed-term penalties, bonus end dates and tax (taxable account vs Cash ISA) all matter. Compare the full product, not the percentage alone.
Why is AER sometimes higher than the gross rate?
More frequent compounding can lift the AER slightly above the quoted gross under the annual-equivalent illustration. That is normal — still compare AER with AER.
Does AER include welcome bonuses?
Often the main AER is shown without conditional bonuses unless the advert clearly says otherwise. Always read the small print for bonus length and the rate afterwards.
Is AER the same as APR?
No. AER is for savings-style rates. APR is for borrowing costs. See APR explained.
Does a Cash ISA AER mean I can ignore the £20,000 allowance?
No. ISA contributions still sit inside the annual allowance (£20,000 for 2026/27). AER describes the rate language, not how much you can pay in. See ISAs.
Does a high AER mean my money is safer?
No. Safety for eligible deposits is about FSCS and who authorises the firm — not the size of the AER. Check FSCS limits (£120,000 from 1 December 2025) separately from the rate.
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