Savings Interest Calculator

How do interest rates work?

Interest rates can tell you two things. If you’re borrowing money, as in a mortgage or loan, the interest rate tells you how much it’ll cost to have that money from the bank. If you’re saving money, the interest rate shows how much the bank will pay you for keeping your money with them.

So, let’s say you have £3,000 in a savings account, with an annual interest rate of 2%. At the end of the year, you’ll get £60 in interest minus any tax.

Banks and Building Societies are free to set their own interest rates, but they usually follow the Bank of England base rate fairly closely - and if the base rate goes up or down, savings interest rates tend to quickly follow suit.

For borrowers, if the base rate increases it’s usually bad news, as it means higher payments on mortgages. However, for savers, it’s good news, as you can expect to earn more from your savings.

And the more you pay into your savings, the more you’ll earn in interest. Although 1% or 2% might not seem like much, it can add up over time - particularly good news if you’re saving up to buy a house, as every little really does help.

What is compound interest?

Normally savings accounts offer compound interest, which means that when your interest is paid it’s automatically added to the amount you’ve got in your account, and then you start to earn interest on the higher amount. So, to use the previous example, if you have £3,000 saved, and earn £60 interest which is paid once at the end of the year, your total balance at the end of that year will be £3,060. With compound interest, any future interest will now be calculated based on £3,060 for the next year.

Then, after two years, you’d earn another £61.20 in interest, bringing your total savings to £3,121.20. Interest would then be calculated on that amount, and after three years, you’d earn a further £62.42, giving you a total of £3,183.62 in your savings account.

So, as well as earning money on your savings, you’re also earning money on your interest. The example amounts we’ve used here are quite small, but you can see how your savings could build up over a long time.

That’s why it could be a good idea to take out a compound interest savings account, and save as much as possible into it when you’re saving up to buy a house, or any other big purchase.

With some high-interest accounts, you may be limited when it comes to withdrawals, so if you do want to be able to get at your savings at short notice, check with your bank or building society if and when you can withdraw money from your account. However, if you’re saving long-term, then a compound interest savings account can be a great way of topping up your home buying fund.

Do you need to pay tax on interest from savings?

Most people in the UK can earn some interest on their savings without having to pay tax by using their personal savings allowance (PSA). This tax-free amount allows you to earn interest on your savings without paying tax.

Your allowance depends on the level of income tax you pay:

• Basic rate taxpayers (20%) can earn £1,000 in savings interest per year, without paying tax on the interest
• Higher rate taxpayers (40%) can earn £500 in savings interest per year, without paying tax
• Additional rate taxpayers (45%) don’t get a personal savings allowance

If you’re based in Scotland, although you pay different rates of income tax, the English tax bands are used for the purposes of the PSA.

You can work out how much tax you’ll pay on your savings interest using our savings interest calculator - select what rate of tax you’re on and we’ll calculate how much tax, if any, we estimate you’ll have to pay on your interest.

Your PSA covers interest earned from:

• Bank accounts
• Savings accounts
• Credit union accounts
• Building societies
• Corporate bonds
• Government bonds and gilts
• Peer-to-peer lending

Interest from cash ISAs isn’t included in your PSA, and it also doesn’t include dividend income from shares or funds. It does include interest distributions from authorised unit trusts, open-ended investment companies and investment trusts, and most purchased life annuity payments.

If you have a salary of £17,570 or less, you can take advantage of the starting savings rate. This enables you to make up to £5,000 in savings interest, tax-free - in addition to your personal income tax allowance and your PSA.

At current interest rates, you need to save tens of thousands before you have to start paying tax on your savings interest.

Based on current rates, assuming you’re getting an interest rate of 2% on your savings, a basic rate taxpayer can save £50,000 before starting to pay tax on savings, and if you’re a higher rate taxpayer you can save £25,000 before paying tax.

You can use our savings account interest rate calculator to work out how much you can save before you need to pay any tax.

Are you saving for a mortgage?

If you’re using our savings calculator because you’re saving for a mortgage deposit, why not go one step further? Our Online Mortgage Finder can give you an idea of how much you could borrow, what it will cost and the deals you might qualify for.

It’s also worth having a look at our guides, which contain lots of useful information whether you’re a first time buyer, or looking to upgrade your home, and can help you to understand the different mortgage options available to you.