What does AER mean?

AER is a common financial acronym that’s often seen alongside savings account interest rates in the UK. Short for Annual Equivalent Rate, it shows how much interest you’ll earn on a savings account over a year, with compound interest factored in. Here, we'll cover how AER works, how it’s calculated, how it’s differs from other interest rate calculations, and what AER means to you as a saver. You’ll find all the savings accounts advertised in our marketplace are displayed with the AER, allowing you to quickly and easily compare products with different terms.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

In the UK, AER stands for Annual Equivalent Rate, and it’s a common way to illustrate the interest earned on savings accounts. It allows you to see how much interest you could earn over a full year, even if the account pays interest monthly, quarterly, or annually. 

AER is the interest rate most commonly used to make comparisons between savings accounts and investments, because it takes into account compound interest, which is where you earn interest not just on your initial deposit, but also on any interest already accumulated. However, it doesn’t factor in bonuses or bank charges.

So what is AER interest used for? Say you’re deciding between an ISA, fixed rate bond, or easy access savings account. You’ll likely see each account states the AER, meaning banks can present interest in a consistent, yearly format, making it easier to evaluate accounts with different terms and interest payments. Generally speaking, the higher the AER, the greater the return on your money.

The gross interest rate, or gross rate, is the basic annual rate of interest paid on a savings account. 

Unlike the AER, it does not account for compounding. It simply shows the amount of interest you’ll earn on your money each year before any tax deductions.

AER interest is generally the more effective way to compare savings accounts, as it reflects the true annual return on your money. It’s worth noting that savings interest is treated as income for tax purposes, so your final gains may be lower, unless the money you earn falls within the Personal Savings Allowance.

Having explored what AER means, you can easily compare savings accounts and shop around to see which will give you the best return. Compare the top offers available through Raisin UK.

AER accounts for compound interest, not simple interest. It shows how much interest you’ll earn in a year if your interest is compounded, whereas simple interest calculates a fixed amount of interest each year.

Compound interest is the interest you earn on both your original deposit and any interest you’ve already received. In other words, it’s interest that’s paid on your original balance plus interest on your interest. If your account pays interest monthly, that interest is added to your balance, and future interest is calculated on the new, higher amount.

It might sound like a riddle, but compounding can be a very effective way to grow your savings over time. And using the AER means you’ll get a more accurate idea of your earnings than you would by looking at simple interest alone. Not all savings accounts offer compound interest, so it’s worth checking the details of a savings account before you apply.

How often interest is compounded depends upon the bank offering the savings account. You may see a savings account advertising that ‘interest is calculated daily, compounded annually, and available on maturity’. This means the bank is checking your balance and accruing interest daily, but it is paying you that interest once a year and making the whole sum available to you at the end of the fixed term.

Regardless of how frequently interest is compounded, the AER always illustrates what you could earn within a year if interest were compounded annually.

Calculating the annual equivalent rate will allow you to work out exactly what’s happening with your savings. To calculate AER interest, you need to consider both the gross interest rate and how often the interest is paid. Simply divide the gross interest rate by the number of times per year that interest is paid on your account, and add one.

You then raise the result to the power of the number of times a year interest is paid. Subtract one from that result and you’ll be left with the AER. An example of this calculation is explored below.

The AER formula is quite complicated, which is why we do the calculations for you to show how much you’ll earn from any savings account on our marketplace. If you want to do the maths yourself, it’s easiest to start with a one year fixed rate bond which pays interest annually, as all you need to do is multiply your deposit amount by the AER.

The following equation shows how much you would earn when your one year fixed term deposit of £10,000 with a 5.00% AER matures:

£10,000 x 5% = £500

£10,000 + £500 = £10,500

Working out how much cash you’ll earn from fixed rate bonds with terms other than one year, or if interest isn’t paid annually, is a little more complicated.

The following calculation shows an example of a 2-year fixed rate bond with 3.90% AER interest compounded annually:

• Year 1: £10,000 x 3.90% = £390 in interest, bringing the balance to £10,390.

• Year 2: £10,390 x 3.90% = £405.21 in interest, bringing the final balance to £10,795.21.

You can use the AER formula to work out how much interest you’ll earn from 2 year fixed rate bonds, 3 year fixed rate bonds, and fixed rate bonds with other terms. The good news is that at Raisin UK, we do the maths for you so you can see how much you could earn from a savings account before you

It’s always worth ensuring that you fully understand how a savings account works before you apply for it, but it’s especially important to check how interest is being advertised. According to UK Finance guidance* a bank or building society in the UK should always advertise the gross rate of interest as well as the AER on accounts that pay interest. 

While these percentages can be the same, the actual interest you earn could be different. If you compare the gross interest rate from one account with the Annual Equivalent Rate on another, you may end up with a misleading comparison. That’s why Raisin UK and other savings marketplaces use the AER, as it’s considered the truly reflective rate.

AER variable means that your savings account provider can change the interest rate on your savings account. A savings account provider should advertise how much notice they’ll give you of a rate change. If the AER rate is variable, it means that it could increase or decrease based on changes to the Bank of England base rate (as well as other factors).

If you’re shopping around for savings accounts, you can make a more informed decision by learning what’s next for interest rates in the UK. That way, you can better see what might be in store for accounts with variable AER interest rates.

With so many acronyms in banking and finance more generally, AER can easily be confused with other terms.

• EAR stands for ‘equivalent annual rate’, and it’s similar to the AER, but rather than showing how interest will be calculated for a savings account, the EAR is used when displaying interest rates for lending, such as loans, mortgages, credit cards, and overdrafts. 

• APR stands for ‘annual percentage rate’. Like the EAR, APR reflects the cost of borrowing money, including interest and fees, but doesn’t account for compounding (unlike the EAR).

• APY stands for ‘annual percentage yield’, and it acts in a similar way to the AER, in that it factors in interest being calculated at multiple stages during a savings account’s term, giving you a clearer picture of how much interest you’ll earn. The APY is more commonly used in the USA, whereas the AER is the standard interest rate used in the UK.

• You may also see Islamic savings accounts advertised with an EPR, or ‘expected profit rate’. That’s because Sharia law doesn’t allow you to earn interest in the same way as traditional banking. Instead, Islamic banks will pay you from profit that is made during the year, rather than from interest.

We display the interest rates of all savings accounts on the Raisin UK savings marketplace with the AER because it makes it easier to compare the profitability of savings accounts, so you can make an informed decision.

Our aim is to make choosing and opening a savings account as easy as possible. That’s why we give you the ability to apply for savings accounts from different banks and building societies in just a few clicks.

Simply register for a free Raisin UK Account through the website or via our app to apply for the best savings account for you, compare savings accounts, or look simply explore offers from our partner banks.

Our aim is to make choosing and opening a savings account as easy as possible. That’s why we give you the ability to apply for savings accounts from different banks and building societies in just a few clicks.

Simply register for a free Raisin UK Account through the website or via our app to apply for the best savings account for you, compare savings accounts, or look for a partner bank.

*https://www.ukfinance.org.uk/system/files/2025-02/Annual%20Equivalent%20Rate%20AER%20practice%20note_0.pdf