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Earning interest on savings
As a very simple example, imagine you have £1,000 in a savings account offering interest at 3% per annum. After one year, you could expect to receive interest of £30.
Interest may be paid to you monthly, annually, or at another time, even though it's calculated per annum.
To work out the monthly amount, for example, simply divide the per annum figure by 12. So, if you earned £30 in interest per annum that would equate to £2.50 per month.
When browsing for savings accounts, look out for the AER, or Annual Equivalent Rate. This should help you to compare accounts and understand the potential gains more clearly. That’s because AER accounts for the effect of compound interest, where you can earn interest on interest you’ve already earned.
Paying tax on interest earned
The government set limits on what you can earn before tax is payable. These limits and rules change over time. Taxable income could include interest from savings accounts, or dividends from investments. Interest earned through an ISA is usually tax-free.
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