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Understanding interest rates

Get to grips with interest rate jargon

When you're looking at interest rates on savings accounts, you'll be faced with some terms that describe the type of rate being illustrated. Here's a quick guide to interest rate jargon.

Gross

This is the interest rate paid before any income tax has been deducted. If you're a non-taxpayer you can register to have the interest paid gross. You can register:

  • By phone - call us on 0845 602 2828. Make sure you have your national insurance number to hand
  • By post - send us a completed form R85 (PDF, 40Kb)
  • Online - you can register a new internet account for gross interest as part of the online application process

Net

This is the amount of interest paid after income tax has been deducted at the basic rate - currently 20%. If you're a higher rate taxpayer, you may have to pay more tax.

AER

AER means Annual Equivalent Rate. It is the amount of interest added to your account each year, no matter how frequently it is paid. The AER gives you a more accurate way to compare rates across different accounts.

For an account that pays annual interest, the AER will be the same as the gross rate.

Gross is the contractual rate of interest payable before the deduction of income tax at the rate specified by law.

AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. As every advertisement for a savings product, which quotes an interest rate, will contain an AER you will be able to compare more easily what return you can expect from your savings over time.

NET rates are illustrative only, allowing for the deduction of income tax at 20%. If you are a higher rate tax payer, you may have a further amount to pay. If we deduct more tax than you have to pay this can be reclaimed from HMRC.

Tax free is the contractual rate of interest payable where interest is exempt from income tax.

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