How compound interest works
Simple interest pays you on your original deposit only. Compound interest pays you on the deposit and on every bit of interest it has already earned, so the balance grows faster every year. Over short periods the difference is small; over decades it is enormous.
P is your starting amount, r the annual rate as a decimal, n the compounding periods per year and t the term in years. This calculator compounds monthly (n = 12) and adds your contribution at the end of each month, which is close to how most UK savings accounts behave.
Worked examples
Why starting early beats saving harder
Because growth compounds, time in the account matters more than the size of the deposits. A saver who puts away £100 a month from age 25 will usually finish far ahead of one who saves £200 a month from age 45, despite paying in less overall. The first pounds you save do the most work, so the best month to start is this one.
Figures are for guidance only and are not financial advice. Rates change, and real accounts may compound and pay interest on different schedules.
Frequently asked questions
What is compound interest?
Compound interest is interest paid on both your original money and on the interest it has already earned. Each period the balance grows, and the next round of interest is calculated on that bigger balance, so growth accelerates over time rather than staying flat.
How often does this calculator compound?
Monthly, with contributions added at the end of each month. Most UK savings accounts calculate interest daily or monthly and pay it monthly or annually. The published AER lets you compare accounts on an equal footing whatever their compounding schedule.
What is the difference between AER and the gross rate?
The gross rate is the flat annual rate before compounding is considered. AER (annual equivalent rate) shows what you would actually earn in a year once compounding is included, which is why AER is the number to compare between accounts.
Is tax included in these figures?
No. The calculator shows growth before any tax. UK savers have a personal savings allowance, and interest earned inside a cash ISA is tax-free. If your interest will exceed your allowance, your real return will be lower than shown.
What is the compound interest formula?
For a lump sum, the final value is P × (1 + r ÷ n) to the power of n × t, where P is the starting amount, r the annual rate as a decimal, n the number of compounding periods per year, and t the number of years. Regular contributions are added period by period on top of that.