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What is a net rate?

Category: Savings
Author: Tim Leonard
Updated: 11/12/2017

What does net rate mean?

Net rate is the rate of interest you receive on a savings account after tax (specifically after basic rate tax of 20%, also known as VAT) has been deducted.

You may see a net rate of interest displayed by some banks and building societies on literature or websites, but as interest is now paid without the deduction of tax, net rates may not be so well publicised (however, they're still relevant if you receive more interest than your Personal Savings Allowance allows).

As with gross rate, the net rate shows you what you'd receive at the outset of taking out the savings account. It doesn't take into account compound interest (where you earn interest on your initial investment and any accumulated interest), and nor does it give a truer annual rate like an AER does, if the savings account you are looking at has an introductory bonus of less than a year.

As well as this, a net rate normally only shows the rate of interest you'd receive at outset if you're a basic rate taxpayer, so if you pay higher rate or additional rate tax it can be a misleading comparison. Remember that if you're a basic rate taxpayer, the personal savings allowance means you can earn £1,000 in savings interest per tax year before tax is deducted (if you're a higher rate taxpayer the amount is £500, and if you're an additional rate taxpayer you don't get a savings allowance at all).

In order to find out what your personal net rate of interest is, you'd need to deduct your tax rate (basic rate at 20%, higher rate at 40% and additional rate at 45%) from the gross rate.

For example, if the gross rate offered by a savings account is 3.00% and you're a higher rate taxpayer, you would do the following calculation:

3 – 40% = 1.80%

Using your own "net rate" is also a good way to compare a non-ISA savings account against the gross rate on a cash ISA.

What Next?

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Guide: How are my savings taxed?

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.