Thinking you know something about your finances when you actually don't can have expensive consequences – it may end up costing you money or make you lose out on earnings.
Take AERs, gross and net rates. These three terms have been commonplace in the savings landscape and were once displayed on virtually every savings account in the market. Net rate may not be as familiar to you as banks and building societies now pay interest without tax being deducted, but it's important to know what each of these terms mean, and more importantly, how you can use them to compare different accounts.
So, to help make things clearer, we've compiled this table - but please see these fuller definitions of Annual Equivalent Rate, Gross rate and Net rate for more information.
Annual Equivalent Rate (AER)
Does this interest rate take into account any income tax I may need to pay?
No. After 6 April 2016 savings interest will be paid gross. Every basic rate taxpayer now has an annual Personal Savings Allowance that means they can earn up to £1,000 interest without paying tax on it. Higher rate taxpayers have a £500 allowance. If you earn more than your allowance, you must declare it to HMRC (the net rate will also be important to you).
The net rate is the rate of interest you receive after tax if you need to pay tax on your interest.
Can I use this rate to easily compare an account that pays monthly interest with an account that pays yearly interest?
Can I use this interest rate to compare a normal savings account with a cash ISA?
No, as the AER doesn't take any income tax you have to pay into account.
Yes, but be careful if you breach your Personal Savings Allowance as you will need to pay tax on some of your interest and it won't be a fair comparison.
Possibly. If you pay tax on your savings, you could compare the net rate on a normal savings account with the gross rate on a cash ISA (although this won't work if one of the accounts has an introductory bonus of less than one year, or has a different interest payment frequency, e.g. monthly or yearly).
What if the savings account offers an introductory bonus – does the rate include this?
If the introductory bonus lasts less than one year, does the rate show what happens when this ends?
Yes. An AER shows the rate of interest you would earn if you kept your savings in the account for a full year. Where an introductory bonus is for less than a year, the AER shows the effect of the bonus for the whole year – including any period after the bonus finishes.
No. A gross rate only shows what you would earn at the outset – with the bonus.
No. A net rate only shows what you would earn at the outset – with the bonus.
Does the rate show what the real return on my savings is, after inflation?
Find the best savings rates for you - Compare savings accounts
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
Moneyfacts.co.uk will, like most other websites, place cookies onto your computer’s
hard drive. This includes tracking cookies.