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after 10 years
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For guidance only — not financial, tax or legal advice. Verify with a qualified professional.
About compound interest
How does compound interest work?
Compound interest means you earn interest not just on your original deposit, but also on all the interest you've already accumulated. Over time, this "interest on interest" effect accelerates your savings growth dramatically — particularly over longer periods. For example, £10,000 at 5% annually becomes £16,289 after 10 years with compound interest, versus just £15,000 with simple interest.
How often should interest compound for the best return?
The more frequently interest compounds, the better for your savings. Monthly compounding produces a slightly higher return than quarterly, which in turn beats annual compounding. For example, £10,000 at 5% for 10 years gives: £16,470 monthly, £16,436 quarterly, and £16,289 annually. The difference grows significantly over longer periods and with higher balances. Most UK savings accounts compound monthly or annually.
Should I hold my savings in an ISA?
For most UK savers, a Cash ISA or Stocks & Shares ISA is the most tax-efficient home for savings and investments. Interest and gains inside an ISA are completely free from Income Tax and Capital Gains Tax — which means your compound growth is never reduced by tax. The annual ISA allowance is £20,000 per tax year (2025/26). If you're a higher-rate taxpayer, the benefit is even greater as your Personal Savings Allowance is only £500 outside an ISA.
What is the Effective Annual Rate (EAR)?
The Effective Annual Rate (EAR) — also called the Annual Equivalent Rate (AER) in the UK — shows the true yearly return once the effect of compounding is taken into account. A headline rate of 4.8% compounded monthly gives an EAR of 4.91%, because each month's interest itself earns interest during the year. When comparing savings accounts, always compare AER figures rather than nominal rates, as they put all accounts on an equal footing.
Does the order of deposits matter?
Yes — earlier contributions benefit from more years of compounding and therefore grow the most. This is why starting early is so powerful, even with small amounts. Putting £100/month into savings from age 25 will typically produce a significantly larger pot at 65 than starting at 35 with £200/month, even though the total contributions are similar. Time in the market is one of the most powerful factors in compound growth.