Compound interest is often called "the eighth wonder of the world" - and with good reason. Unlike simple interest, which is calculated only on your initial deposit, compound interest is calculated on your principal plus all previously accumulated interest. This means your money grows exponentially over time.
The effect is particularly powerful when combined with regular contributions. Even modest monthly savings can grow significantly over decades thanks to compounding.
The compound interest formula with regular contributions is:
FV = P(1 + r/n)nt + PMT × [((1 + r/n)nt − 1) / (r/n)]
Where:
Suppose you deposit £5,000 and contribute £200/month at 3.75% annual interest, compounded monthly, for 10 years:
Use the calculator above to try your own numbers and see how the growth chart changes with different rates, contributions, and time periods.
Yes, but less than you might think. Monthly compounding at 5% gives you an effective annual rate (AER) of about 5.12%, versus exactly 5% with annual compounding. The difference grows with higher rates and longer periods, but for typical UK savings rates it's relatively small.
Most UK savings accounts compound annually or monthly. The AER (Annual Equivalent Rate) that banks advertise already accounts for compounding frequency, making it easier to compare products.
With the Bank of England base rate at 3.75%, competitive savings accounts are currently offering around 4.3% for easy access and 4.4% for one-year fixed rates. These rates directly affect how quickly your savings compound.
For the best current savings rates, see our savings interest calculator which lets you compare different rate scenarios.
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (calculated on the principal only), compound interest means your money grows exponentially over time - you earn interest on your interest.
More frequent compounding produces slightly higher returns. Monthly compounding earns more than quarterly, which earns more than annually. Most UK savings accounts compound annually or monthly. The difference becomes more significant with larger sums and longer time periods.
The current Bank of England base rate is 3.75% as of 2026-02-06. This rate influences savings account rates, mortgage rates, and other borrowing costs across the UK.
The gross rate is the simple annual interest rate before compounding. The AER (Annual Equivalent Rate) shows the true annual return after accounting for compounding frequency. AER makes it easy to compare savings accounts that compound at different frequencies. A 5% gross rate compounded monthly has an AER of about 5.12%.
Rates as of 2026-04-12. Source: Bank of England Interactive Analytical Database (IADB).