Gross, Net and Gross AER Interest rates

Gross interest rate This is the total interest payable before any deductions such as tax and charges. For example the gross interest rate on a savings account may be 4.25%

Net Interest Rate. This is the total interest payable after any deductions. For example in the UK, the net interest rate will be the gross interest rate – basic rate of income tax. Therefore, if the gross rate is 4.25%, the net rate will be 3.40%.

Gross AER. This is the Gross Annual Equivalent rate. This applies to all accounts where interest rates are paid more frequently than once a year. The significance of this is that if you are paid interest every month, you have a chance to earn interest on the interest payments you gain in the first month. If interest is calculated daily the cumulative benefit will be greatest. Therefore, the Gross AER, will be higher than the gross interest rate. Typically interest is credited monthly, quarterly or in rare cases daily.

• Interest Rates explained
  
• Effect of Increasing Interest Rates