What Is AER, and How Is Savings Interest Actually Calculated?
Savings accounts advertise an AER, but what that figure means, and how it is calculated, is not always clearly explained. This guide sets it out in plain English, shows the maths behind “calculated daily, paid monthly”, and works through what it looks like in pounds.
AER stands for Annual Equivalent Rate. It shows how much interest your savings would earn over a full year, including the effect of compounding, making it easier to compare savings accounts on a like-for-like basis. A 3.00% AER means you would earn roughly £30 in interest over a year for every £1,000 saved, assuming the balance remains unchanged, whether the account pays interest monthly, quarterly or annually.
What AER Actually Means
AER stands for Annual Equivalent Rate. It answers a simple question: if you left your money in the account for a full year, how much interest would you earn once compounding was taken into account?
That last part is the bit that makes AER useful. Savings accounts pay interest at different times. Some pay monthly, some quarterly, some once a year. Comparing these rates directly can be misleading, because interest paid earlier in the year has more time to earn additional interest than a payment made at the end of the year.
Interest calculations generally use calendar days, meaning weekends are included rather than treated as non-interest days. For example, where interest is calculated daily, the balance can earn interest on Saturdays, Sundays and other days when banks may be closed. For AER, the return is annualised to provide a standard basis for comparing savings accounts and takes the effect of compounding into account.
AER solves that by putting every account on the same footing. UK savings providers generally display an AER, allowing customers to compare accounts on the same basis. When comparing products, look at the AER rather than comparing it directly with a different type of rate.
The quick version: a 3.00% AER means roughly £30 a year for every £1,000 you save, assuming the rate does not change and you leave the money alone. It does not matter whether the account pays you monthly or annually, the AER has already taken that into account.
AER vs the Gross Rate
Alongside AER you will sometimes see a gross rate. The two get confused constantly, but the difference is simple.
Gross rate
The rate of interest payable before any tax is deducted, without adjusting the figure to show the effect of compounding over a full year.
AER
The rate once compounding is included. If an account pays interest more than once a year and the interest is added to the balance, its AER will be slightly higher than its gross rate. If interest is paid only once a year, the two are identical.
Here is that in real numbers. An account paying 3.00% AER with interest paid monthly has a gross rate of about 2.96%. The gross rate appears lower, but the monthly interest payments begin earning interest themselves. Over a full year, this compounding brings the effective return to 3.00% AER. Both accounts below leave you with the same amount:
| Paid monthly | Paid once a year | |
|---|---|---|
| Gross rate | 2.96% | 3.00% |
| AER | 3.00% | 3.00% |
| Interest on £5,000 after a year | about £150 | about £150 |
“A lower gross rate paid monthly can be worth almost the same as a higher gross rate paid annually. That is the whole reason AER exists.”
How Daily Interest Is Worked Out
“Calculated daily, paid monthly” is a phrase you will see on a lot of accounts, including SSV SmartAccount. Here is what is happening behind it.
Each day, the bank looks at your closing balance and works out one day’s worth of interest, which is broadly the gross annual rate divided by 365. The interest accrued each day is recorded and then added together over the monthly payment period, before being paid into your account as a single sum. From that moment, the interest you have been paid is part of your balance, so it starts earning interest too.
Calculating daily does not by itself raise your AER, because the AER already reflects how and when interest is paid. What it does mean is that every single day your money is in the account counts. If you deposit money partway through the month, interest can begin accruing from the date the funds become eligible, subject to the account’s terms. It also means a balance that moves up and down is treated fairly, day by day.
A Worked Example, in Pounds
Percentages are often easier to understand when they are translated into pounds and pence. Take £5,000 in a savings account at 3.00% AER, with the rate unchanged and nothing paid in or taken out.
The monthly figure moves slightly with the length of the month, since a 31-day month earns a little more than a 30-day one. And because each payment joins your balance, the amounts creep up very gently as the year goes on. That is compounding doing its work, and it is already built into the 3.00% figure.
Scaled up or down, at 3.00% AER the rough shape is the same:
| If you saved | Roughly per month (average) | Roughly over a year |
|---|---|---|
| £1,000 | about £2.50 | about £30 |
| £5,000 | about £12.50 | about £150 |
| £10,000 | about £25 | about £300 |
| £20,000 | about £50 | about £600 |
These are illustrations rather than promises. Rates are variable, so they can go up or down, and any money you add or withdraw changes the daily calculation from that day onward.
What to Check Before Comparing
AER provides a useful starting point for comparison, but it does not tell you everything about an account. Before choosing one, consider these four points.
Is the rate variable or fixed?
A variable rate can change, often in line with the Bank of England base rate. A fixed rate holds for a set term, usually in exchange for locking your money away.
Does the rate apply to your whole balance?
Many accounts are tiered, meaning the advertised rate applies only to balances within a particular band. Check which tier your money would actually sit in.
Are there conditions attached?
Introductory bonuses that drop after a year, minimum balances, or limits on withdrawals all affect what you really earn, even when the AER looks attractive.
Is your money protected?
Check the account is provided by a UK-authorised bank, building society or credit union, so eligible deposits are protected by the FSCS up to £120,000 per eligible person, per authorised institution.
For reference, SSV SmartAccount pays up to 3.00% AER (variable) on savings and up to 1.50% AER (variable) on the current account, with interest calculated daily and paid monthly, and no minimum balance. Rates are variable and may change in line with the Bank of England base rate, and the rate shown applies to balances within the applicable tier. The underlying bank accounts are provided by Griffin Bank, a UK-authorised bank, so eligible deposits are FSCS protected up to £120,000 per eligible person.
One more thing on tax: AER and gross rates are quoted before tax. Depending on their tax band, many people may be able to earn a certain amount of savings interest each tax year without paying tax, through the Personal Savings Allowance. Your own position depends on your circumstances, so check the current allowance on GOV.UK or speak to a tax adviser.
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Frequently Asked Questions
What does AER mean?
AER stands for Annual Equivalent Rate. It shows what you would earn over a full year including compounding, which is earning interest on interest already paid. Every UK savings account must show an AER, so it is the figure to use when comparing accounts.
What is the difference between AER and the gross rate?
The gross rate is the rate of interest payable before any tax is deducted, without adjusting for the effect of compounding. AER includes compounding. If an account pays interest more than once a year and the interest is added to the balance, its AER will be slightly higher than its gross rate. If interest is paid only once a year, the two are the same.
How is savings interest calculated daily and paid monthly?
Interest is worked out on your closing balance each day, broadly the gross annual rate divided by 365. Those daily amounts build up through the month and are paid in as a single sum. Once paid, that interest joins your balance and starts earning interest itself.
How much interest would £5,000 earn at 3.00% AER?
Roughly £150 over a year, if the rate stayed the same and you did not pay in or take money out. That works out at about £30 a year for every £1,000 saved.
Does daily interest mean I earn more?
Not by itself, because the AER already reflects how and when interest is paid. What it does mean is that every day your money is in the account counts, so you start earning from the day you pay in rather than waiting for a monthly cut-off.
Do I pay tax on savings interest?
AER and gross rates are shown before tax. Depending on their tax band, many people may be able to earn a certain amount of savings interest each tax year without paying tax, through the Personal Savings Allowance. Your position depends on your circumstances, so check GOV.UK or speak to a tax adviser.
What interest does SSV SmartAccount pay?
Up to 3.00% AER (variable) on the savings account and up to 1.50% AER (variable) on the current account. Rates are variable, may change in line with the Bank of England base rate, and the rate shown applies to balances within the applicable tier.
Sources
- SSV SmartAccount, current interest rates and terms: ssvsmartaccount.co/interest-rates
- SSV SmartAccount, Savings Summary Box: app.ssvsmartaccount.co
- How the FSCS protects your money: app.ssvsmartaccount.co
- Financial Services Compensation Scheme: fscs.org.uk
- GOV.UK, tax on savings interest and the Personal Savings Allowance: gov.uk
Important information
Rates quoted are correct as at September 2026. The rate shown is the highest variable Annual Equivalent Rate (AER) available and applies only to balances within the applicable tier. Interest is calculated daily and paid monthly. Rates are variable and may change in line with the Bank of England base rate. Tier thresholds, eligibility criteria and full terms apply. Examples in this article are illustrative only and assume the rate stays the same and no money is paid in or withdrawn.
SSV SmartAccount Limited is a financial technology company, not a bank. Bank accounts are provided by Griffin Bank Ltd (“Griffin”), a company registered in England and Wales (No. 10842931). Griffin is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Griffin’s firm reference number is 970920. Eligible deposits held with Griffin are protected by the Financial Services Compensation Scheme (FSCS) up to the current limit of £120,000 per eligible person, per UK-authorised bank, building society or credit union.
This article is general information about how savings interest is calculated and is not financial or tax advice.
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