If you pay the basic rate of income tax, you can earn £1,000 in interest before tax. How much your tax-free amount is depends on your tax rate. If you're a UK taxpayer, you might get the UK Personal Savings Allowance, which basically lets you earn some interest before tax. You'll need to tell HMRC yourself if you need to pay tax on your interest. We don't deduct tax from your interest before it's paid to you, as the amount of tax you pay depends on how much you earn. Interest you earn with a bank is taxable in the UK. With a 1% AER interest rate that means, if you put in £1,000 on your first day, you'd earn £10 in interest over the year. If nothing changes (including the interest rate), you'd have £1,010 at the end of the year. We calculate your interest daily and pay it monthly. Chase interest ratesĮffective from 28 March 2022. The interest you receive is subject to taxation. Gross interest is the rate used to calculate your monthly interest payments where no tax is deducted. The AER enables you to easily compare the interest rates on accounts from different banks and building societies where interest may be calculated or paid at different frequencies. It's short for Annual Equivalent Rate and shows the interest rate for a year, taking into account any interest payments made to you during the year. Related ReadingsĬFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst.AER is the rate of interest you earn from us on any balance above £0. Therefore, the AER of the bond will be:Īfter analyzing the AER of the two bond options, a rational investor will select Bond B, assuming all else equal, even though both bonds are the same from face value. However, the AER will be even higher, as the coupons are paid out four times a year. The nominal rate of the bond is still 6%. Therefore, the AER of the bond will be calculated as:īond B, on the other hand, offers a quarterly coupon rate of 1.5%. However, the AER of the bond will be higher given that interest is paid out two times a year. The nominal rate of the bond is 6% since it is two 3% coupons. Nominal Interest – Exampleįor example, let’s say Bond A offers a semi-annual coupon rate of 3%. The table below visualizes the potential differences in the annual equivalent rate and the nominal rate with different compounding frequencies: Annual Equivalent Rates of Different Compounding FrequenciesĪnnual Equivalent Rate vs. It means that the AER is always higher than the nominal rate when considering compounding. The nominal rate, or the stated rate, can be materially different than the AER due to the effects of compounding.

The AER is crucial in finding the true return on investment (ROI) from interest-bearing assets. Therefore, it can be used by both an individual looking for the best savings account or an investor comparing bond yields. The annual equivalent rate is used to compare the interest rates between loans or investments with different compounding periods, such as weekly, monthly, half-yearly, or yearly. The formula for the annual equivalent rate is given below:

The AER will always be higher than the nominal, or the stated rate, when compounding is present.It is an important tool for evaluating bonds, loans, or accounts to understand the real return on investment (ROI) or interest rate.The Annual Equivalent Rate (AER) is the real rate of interest because it accounts for the effects of compounding.

Aer meaning