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When running a small business, every penny counts. Understanding how your savings work can help you make the most of your hard-earned money. One term you might come across is AER. Here’s a simple guide to help you understand it and use it to your advantage.
Key takeaways
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AER (Annual Equivalent Rate) shows how much interest you'll earn on your savings over a year, factoring in compounding interest payments.
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Compound interest means you earn interest on your original deposit and on the interest that accumulates — helping your balance grow faster over time.
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The gross interest rate is the basic rate before compounding. AER takes compounding into account and shows the true growth potential.
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A higher AER means a greater return on your business savings. Choosing an account with a good AER helps grow your savings faster.
How does AER work?
AER (Annual Equivalent Rate) shows how much interest you’ll earn on a savings account over a year, as a percentage. It factors in compounding, which means earning interest on your interest: each time interest is paid into your account, it’s added to your balance, and future interest is calculated on the new, higher total. This makes AER a great way to see the true growth potential of your savings.
For example, if you maintain a balance of £1,000 in a savings account with a 3% AER, you’ll know exactly how much you’ll have after a year, including all the compound interest earned. With 3% AER, your balance would grow to £1,030 after one year.
Because of this effect, an account that pays interest monthly (and compounds monthly) will often deliver slightly better returns than one that pays annually, even if both have the same gross interest rate.
AER vs. gross interest rate
Here’s a quick comparison of the two terms you’ll see most often when looking at business savings accounts:
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Gross interest rate: Basic rate of interest without compounding.
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AER: Total interest earned including compounding effects.
To put it into context, let’s compare two accounts with the same gross interest rate of 4% but different compounding frequencies. This example assumes a single £100,000 deposit made at the start of the year:
|
Account Type |
Interest Rate |
Payment Frequency |
AER |
Total After 1 Year |
|
Account A |
4% |
Monthly |
4.07% |
£104,070 |
|
Account B |
4% |
Yearly |
4.00% |
£104,000 |
Even though both accounts offer the same gross interest rate (4%), the total amount of interest you’ll earn will be different because of how often interest is compounded.
This shows how compounding can make a difference over time, even with the same gross interest rate. AER helps you make fair comparisons and choose the best account for your business.
How to calculate AER
The formula for AER takes the interest rate and how often interest is paid into account. Here’s how it works:
AER = (1 + interest rate ÷ times interest is paid in a year) ^ times paid - 1
If that formula looks scary, don’t worry. Banks and financial institutions usually provide the AER upfront, so you won’t have to crunch the numbers yourself.
Fixed vs. variable interest rates
When looking at AER, it’s also important to understand whether the rate is fixed or variable.
A fixed interest rate means the rate won’t change for a set period — usually the full term of the savings account — giving you predictable returns. It’s ideal for businesses that want certainty and are willing to lock away their money for a while.
A variable interest rate, on the other hand, can go up or down depending on market conditions or changes in the Bank of England’s base rate. While variable rates might increase and earn you more, they also come with the risk of earning less if rates fall.
Always check which type you're getting, so you can match the account to your business needs and risk tolerance. Here’s a quick comparison to help you weigh the options:
|
Feature |
Fixed Interest Rates |
Variable Interest Rates |
|
Flexibility |
Often requires locking money away for a set period. |
Usually available with more flexible, easy-access accounts. |
|
Earnings Potential |
Interest doesn’t increase if market rates rise. |
May earn more if interest rates increase. |
|
Stability |
Predictable earnings throughout the term. |
Returns may go up or down over time. |
|
Planning |
Easier to plan long-term savings goals. |
Can be harder to forecast returns. |
|
Risk |
No surprises, but you could miss out on better returns elsewhere. |
Less predictable — you might earn less if rates drop. |
How to use AER to save smartly
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Compare accounts easily: AER gives a standard way to evaluate savings options, so you can spot the best deal.
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Boost your cash reserves: Even small differences in AER can add up, especially over time or with larger balances.
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Understand compounding: Frequent interest payments mean higher returns, thanks to compounding.
The bottom line
AER is a simple but powerful tool to help you grow your business savings. By understanding and comparing AER rates, you can:
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Maximise the interest you earn.
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Make informed decisions about where to save your money.
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Ensure your cash reserves are working as hard as you do.
By choosing accounts with competitive AERs, you’re not just letting your money sit idle; you’re actively putting it to work for your business. Whether you’re saving for future investments, creating a buffer for unexpected expenses, or planning for growth, a strong AER can make all the difference. With a little research and a focus on the right metrics, you can ensure your financial resources are being used to their fullest potential.
Remember, your savings are a foundation for your business’s future. By understanding AER and making informed financial decisions, you’re taking a big step toward long-term stability and success.
FAQs
What does AER variable mean?
AER variable means the interest rate on your savings account can change over time. A variable AER could rise or fall depending on market conditions or the provider’s terms, so your returns may vary over time.
What are saving account interest rates?
Savings account interest rates are the percentage of your balance that a bank pays you in return for holding your money. Higher rates — especially when compounded frequently — can significantly grow your savings over time, making them an important factor when choosing where to deposit your surplus funds.
This does not constitute financial advice. Please consult an accountant or financial advisor if you would like more information.
