What is interest on savings?
Saving money is an important step in building financial confidence and can make a real difference to your future. Every penny counts, and so can interest on your savings.
The interest on savings you receive is how much your bank will pay you in return for saving with them, given as a percentage. To put it simply, it’s a way to reward customers. You won’t notice a bank ‘borrowing’ your money — there won’t be any difference to your account balance — but it happens in the background.
How does savings interest work and how is it calculated?
Savings interest is usually calculated daily, and paid monthly or annually. For example, with Spring’s Easy Saver, interest on savings is calculated daily and paid monthly into your savings account within the app.
You’ll usually see interest rates on savings accounts referred to as AER (Annual Equivalent Rate), which shows you the interest rate in a percentage if it was paid each year. Read our guide explaining what AER means and how it works.
By basing the rate on an annual view, AER allows you to see how much interest you’ll earn. This could help you when comparing between different accounts, so you can choose an account that best supports your savings goals.
After all, the interest you earn can help your savings grow over time, and you can even earn interest on your interest through compounding, so it’s important to choose the right account.
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What is compound interest and how does it work?
Compound interest is generated when you receive interest on interest you've already earned. This might sound complicated, but it can have benefits for savings accounts.
For example, in the first year, if you deposit money into a savings account that earns compound interest, you’ll get interest on the original amount. In the second year, if you don’t add or withdraw any funds, you’ll carry on earning interest on the original amount, as well as the interest accumulated in the first year.
Over time, the pattern will continue, meaning each year you earn interest on both your initial deposit and the interest built up over the years. As a result, your money could grow much quicker in comparison to an account that either doesn’t offer an interest rate, or one which requires that interest to be withdrawn each month.
This isn’t to say you can’t withdraw your interest, the option is there should you want to benefit from compounding if that supports your savings goal. Speaking of which, Spring’s savings pots can also help you save for your goals.
What can increase or reduce the interest you earn?
- Not receiving any interest: You shouldn’t presume that your savings are being paid much interest, especially if they’re held in your current account.
- Your rate changing: If you have a variable interest rate which increases, you’ll earn more interest, and vice versa. If your interest rate decreases, you’ll earn less interest.
- Withdrawing the interest due to compounding: If your bank pays your interest monthly and you withdraw it, you’ll miss out on the effects of compounding.
- Paying fees or charges: Although these costs will not be reflected in the interest rate, any fees or charges paid for an account offset the interest earned on your deposits.
Fixed vs variable interest rates
When choosing where to place your savings, it’s important to note that the interest rates offered vary depending on a few different factors - including whether you’d prefer a fixed or variable interest rate.
For example, some fixed rate accounts may offer a higher interest rate, as it requires you to lock your money away for a set period. The interest rate you get stays the same for the agreed term, giving you certainty.
A variable interest rate can move up or down, meaning your returns and the interest you earn could change over time – like it would with Spring’s Easy Cash ISA. This can happen for a few reasons, including the Bank of England changing its base rate - but accounts with a variable interest rate often give you more flexibility in the form of easy access, with an option for withdrawals.
However, the term “easy access” doesn’t always mean instant or unrestricted access, so it’s important to check withdrawal limits, payment times and other conditions. Read more on when easy access isn’t always as easy as you might expect.
How the Bank of England base rate affects interest in savings
The Bank of England base rate is one of several factors that can influence savings rates. Other factors include movements in market benchmark rates, the wider savings market, competitor activity and broader commercial considerations.
The base rate influences how much interest banks pay savers and charge borrowers. When it changes, it’s usually in response to a change in the economic environment in the UK.
You can find out what the current base rate is on the Bank of England website.
Savings interest example
The table below shows how £10,000 in savings can grow over time through earned interest and the effects of compounding. The longer you keep your money in savings, the more your balance can increase.
| Year | Starting balance | Interest earned (4.00% AER*) | Accumulated interest to date | Balance at the end of the year |
|---|---|---|---|---|
| 1 | £10,000 | £400 | £400 | £10,400 |
| 2 | £10,400 | £416 | £816 | £10,816 |
| 3 | £10,816 | £432.64 | £1,248.64 | £11,248.64 |
| 4 | £11,248.64 | £449.95 | £1,698.59 | £11,698.59 |
| 5 | £11,698.59 | £468 | £2,166.53 | £12,167 |
Note: Figures are illustrative only. Small differences may occur due to rounding.
Interest on savings FAQs
Compounding interest makes your savings work harder
Saving money isn’t just about putting it aside - it’s about giving it a chance to grow. By understanding how interest works and choosing the best account to suit your needs, you can make your savings go further over time. Even small amounts can add up, especially when interest build on itself, so you can feel confident about your financial future.
If you’d like to learn more about saving, you can explore our Spring savings guides or learn more about our savings accounts.
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*AER stands for Annual Equivalent Rate and this shows what the interest rate would be if interest was paid and added once each year.
