TL;DR
- AER (Annual Equivalent Rate) shows how much a savings account pays annually, including the effect of compounding.
- All UK savings providers are required by law to display the AER.
- AER is for savings. APR is for borrowing. Never compare them against each other.
- FSCS protects up to 85,000 pounds per person per authorised institution.
- Personal Savings Allowance: 1,000 pounds for basic rate taxpayers; 500 pounds for higher rate.
Key Facts
What Is AER and Why Does It Matter?
AER stands for Annual Equivalent Rate. It is the standard interest rate used to compare savings accounts in the UK, required by law to be displayed by every savings provider. AER shows how much interest a savings account would pay over a full year, expressed as a percentage of the balance, including the effect of compound interest. By standardising all accounts to the same annual basis regardless of how often they pay interest, AER allows fair comparison across all savings products.
The key feature of AER is that it includes compounding. If a savings account pays interest monthly, each monthly payment itself earns interest in the following months. Over a full year, this produces a slightly higher total return than the flat monthly rate would suggest. AER captures this into a single comparable figure. An account paying 4.8% gross monthly has an AER slightly above 4.9%, because the monthly payments compound through the year.
AER vs Gross Rate
The gross rate is the flat annual interest rate before compounding. For an account paying interest once per year, gross rate and AER are identical. For accounts paying interest monthly or quarterly, AER will be slightly higher than the gross rate because of the compounding effect. When comparing savings accounts, always use AER. Two accounts with different gross rates and payment frequencies may offer identical AERs and therefore identical total annual returns.
AER vs APR
AER applies to savings: deposit accounts, ISAs, and cash investments. APR (Annual Percentage Rate) applies to borrowing: loans, credit cards, mortgages, and overdrafts. Both express an annual rate as a percentage but they measure different things. AER measures the return you earn on deposits. APR measures the cost of money you borrow. Higher AER is better for savers. Lower APR is better for borrowers. Never use AER to evaluate borrowing costs or APR to compare savings accounts.
Variable vs Fixed AER
A variable AER can change at any time. Easy-access accounts and notice accounts typically pay variable AER. When the Bank of England base rate changes, variable savings rates usually follow, though there is no obligation on providers to pass on changes in full. Some accounts offer introductory bonus rates for an initial period (typically 12 months) before reverting to a lower rate. Check whether the advertised AER includes a bonus and when it expires.
A fixed AER is guaranteed for the term. Fixed-rate bonds and fixed ISAs lock in a rate for 1, 2, 3, or 5 years. The rate will not change during the term regardless of Bank of England decisions. In exchange, access to the money is typically restricted or unavailable until the fixed period ends.
How Compounding Affects Long-Term Savings
Saving 200 pounds per month at 4.5% AER grows to approximately 2,454 pounds after one year including 54 pounds in interest. Over 5 years at the same rate, 12,000 pounds in contributions grows to approximately 13,362 pounds, earning 1,362 pounds in compound interest. Over 10 years the same contributions produce around 30,200 pounds with approximately 5,800 pounds from compounded interest. A 0.5% higher AER on a 50,000 pound balance held for 10 years produces around 2,600 pounds more in cumulative interest.
FSCS Protection
The Financial Services Compensation Scheme (FSCS) protects savings up to 85,000 pounds per person per authorised institution. Joint accounts are protected up to 170,000 pounds (85,000 per person). The limit applies per authorised institution, not per account or brand. Halifax and Bank of Scotland share a single authorisation under Lloyds Banking Group: combined deposits across both are protected up to a single 85,000 pound limit. Savers with balances above 85,000 pounds should spread savings across separately authorised institutions.
The Personal Savings Allowance and Tax on Interest
The Personal Savings Allowance (PSA) allows basic rate taxpayers to earn up to 1,000 pounds in savings interest tax-free per year. Higher rate taxpayers have a 500 pound allowance. Additional rate taxpayers have no allowance. With best easy-access rates at around 4.5% to 5.0% AER in June 2026, a basic rate taxpayer would need a savings balance of approximately 20,000 to 22,000 pounds before breaching the 1,000 pound PSA. Above that level, interest becomes taxable at the marginal income tax rate.
Interest earned within an ISA wrapper is always tax-free regardless of the amount. The 2026/27 ISA allowance is 20,000 pounds per person per tax year.
Frequently Asked Questions
What does AER mean on a savings account?
AER (Annual Equivalent Rate) shows the annual return on the account including compound interest. All UK savings providers must display the AER by law. A higher AER means a higher annual return on savings.
What is the difference between AER and APR?
AER is for savings and shows the annual return you earn. APR is for borrowing and shows the annual cost you pay. Higher AER is better for savers. Lower APR is better for borrowers.
How much savings interest can I earn tax-free?
In 2026/27, basic rate taxpayers can earn up to 1,000 pounds in savings interest tax-free under the Personal Savings Allowance. Higher rate taxpayers have a 500 pound allowance. Additional rate taxpayers have none. Interest inside an ISA is always tax-free.
Is a higher AER always better?
A higher AER means a higher annual return, all else being equal. Other factors also matter: whether the rate is variable or fixed, access restrictions, minimum deposit requirements, and FSCS protection status of the provider.
What is the FSCS limit for savings?
85,000 pounds per person per authorised institution. 170,000 pounds for joint accounts. Some banking brands share a single authorisation: check the FSCS website if you hold savings across multiple accounts at banks that may share a licence.
