How it works?
Using the AER calculator is simple and only involves couple of steps:
- Find out what is your gross interest rate from your banking provider.
- Find out what is your compounding frequency (eg. daily, bi-weekly or quarterly etc).
- Enter the details above to the calculator to see the AER.
If you want to understand AER or see how it is calculated, please continue reading the article below.
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Understanding AER
AER, or Annual Equivalent Rate, simplifies the comparison of interest rates on savings accounts. It represents the interest earnings on savings over a full year, expressed as a percentage. Think of it as a standardised measure that helps you understand how much interest you will earn annually, making it easier to compare different savings products and choose the best one.
AER provides a clear and consistent way to compare rates, empowering you to make informed investment decisions and maximise your returns. Whether you’re saving for a short-term goal or a long-term plan, understanding AER is the first step towards optimising your savings strategy.
If you want to calculate how much your savings or money might grow over time, please use our Compound Interest and Savings Calculator.
Annual Equivalent Rate might be referred as Effective Interest Rate (EIR), Effective Annual Interest Rate or simply Effective Rate in other contexts.
How AER Differs from Gross Interest Rates
While gross interest rates simply indicate the annual interest paid on your savings, AER goes a step further by accounting for the effects of intra-year compounding. This means that AER provides a more accurate measure of your potential returns, as it reflects the compound interest earned over the year. Unlike gross interest rates, which can be misleading, AER offers a clearer picture of your actual earnings.
For instance, if you have two savings accounts with the same gross interest rate but different compounding frequencies, the account with more frequent compounding would have a higher AER. This is because the interest is compounded more frequently, leading to higher overall returns.
Therefore, understanding the difference between AER and gross interest rates is crucial for making accurate comparisons and choosing the best savings account.
How AER is Calculated
The formula to calculate Annual Equivalent Rate in every-day banking is
AER = (1 + n/r)^n − 1
Where
r = nominal interest rate
n = number of compounding periods per year (e.g. 12 for monthly or 52 for weekly).
In complex finance mathematics continuous compounding is sometimes needed. For example if you need to price an option, you will need to use continuous compounding. The formula to convert continuous interest rate to AER is as follows:
AER = e*r − 1
Where
r = continuous annual interest rate (as a decimal, not a percentage)
e = Euler’s number, approximately 2.71828.
You will not need to convert continuous interest rate to AER in any practical every-day banking situation. We included that option in the calculator just because we wanted our calculator to be the most comprehensive and best UK AER calculator.
Step-by-Step Guide to Using an AER Calculator
Using an AER calculator is simple and only involves couple of steps:
- Find out what is your gross interest rate from your banking provider.
- Find out what is your compounding frequency (eg. daily, bi-weekly or quarterly etc).
Submit the above information to the calculator and see what is your Annual Equivalent Rate.
Comparing Savings Accounts with an AER Calculator
Comparing savings accounts using an AER calculator offers several advantages:
- It provides a standard metric for understanding potential interest earnings across different savings products.
- It helps evaluate the potential earnings of different savings accounts over a year.
- It assists in identifying the best options for maximising savings.
Albeit in the UK Financial Conduct Authority (FCA) does not specify in FCA Handbook that AER has to be visible to customers in its sections BCOPS 2.2A and BCOBS 4.1, it is common practice to display AER in savings account related products.
In January 2025 a leading industry body for financial services UK Finance and the Building Societies Association (BSA) jointly published guidance document for banks and building societies called “Annual Equivalent Rate (AER) Practice Note”. The document replaced the “Code of Conduct for the Advertising of Interest Bearing Accounts” (the Code) and the “Calculation of the Annual Equivalent Rate (AER) appendix to the Code”, which were in place between 1985 and 2024.
The document advises banks and alike to display Gross interest rate, Tax free interest rate and Annual Equivalent rate wherever interest rates are advertised.
FAQ
Frequently asked questions about AER
AER, or Annual Equivalent Rate, signifies the total interest earnings on savings for a year, factoring in compounding effects and expressed as a percentage. This measure allows for an accurate comparison of savings accounts.
AER is crucial for your savings as it enables you to compare potential earnings across different savings accounts, helping you to make informed financial decisions. Understanding AER ensures you choose the account that maximises your interest income.
5% AER would mean 4.87934% nominal rate if compounded daily and 4.88895% nominal rate if compounded monthly.
Yes, but only if your interest exceeds your tax-free Personal Savings Allowance. If the interest is earned within an Individual Savings Account (for example Cash or Stock and Shares ISA), you will not pay taxes on the interest earned. Compare Cash ISA options below.
The type of interest — fixed or variable — directly affects how the AER (Annual Equivalent Rate) is calculated and interpreted, but not the formula itself. Fixed interest rate remains constant for the agreed term and therefore the AER stays the same. In case of variable interest a calculated AER is a snapshot, reflecting the rate at the moment and might change over time.
