Personal Finance Tips

What is the Annual Equivalent Rate (AER): how to calculate it?

Gert Svaiko

30.05.25 (last updated)

Read time 3 minutes

When you’re shopping around for savings accounts, you’re likely to come across the term Annual Equivalent Rate (AER).

But what is AER exactly, and how does it affect how much you could earn from your savings?

Read on to find out everything you need to know about the Annual Equivalent Rate here in the UK, including how to calculate AER.

We’ll also show you a smart, alternative way to make your money work harder. With Wise Interest**, you can help your money grow by investing in a fund that holds government-guaranteed assets - all within your Wise account from the money services provider Wise. It’s not a bank account but offers some similar features, and your money is safeguarded.

Learn more about Wise Interest

Capital at risk. Growth not guaranteed.

What is the Annual Equivalent Rate (AER)?

The Annual Equivalent Rate is a type of interest rate for savings accounts and Individual Savings Accounts (ISAs). Displayed as a percentage, it is used to show how much interest you could earn on a particular account over the course of a year.

The AER is very helpful for comparing savings accounts, as it lets you see how much you could get in interest over 12 months. Some savings accounts run for different terms (e.g. 18 months or 2 years), but AER lets you compare them like-for-like over the same time period.

The higher the AER, the more you’ll earn in interest.

What does AER variable mean?

When you see AER on a savings account or ISA, it’ll often be followed by the word ‘variable’. This means that the amount of interest you’ll earn could go up or down, if the interest rate on the account changes.

If you have a fixed rate savings account, this shouldn’t happen - so you can calculate AER without worrying about the provider changing the interest rate.

📚 Read more: What is an Individual Savings Account (ISA)?

How is AER calculated?

AER is calculated using a complicated formula, which takes factors such as compound interest into account.

But here’s a quick example. Let’s say you open a savings account offering 1.5% AER. If you deposit and hold £500, you’ll have £7.50 in interest at the end of the year.

The difference between AER, APR, and gross interest

You may see other terms used in relation to interest rates, other than AER. The most common are Annual Percentage Rate (APR) and gross interest.

The main difference between APR and AER is that the former is used when you borrow money, such as taking out a credit card. It offers an indication of what interest rate you’ll pay when you borrow money. AER is used for savings, when you’ll be earning interest.

So what’s the difference between AER and gross interest? This other term does actually refer to interest on savings accounts, just like AER. However, gross interest doesn’t take into account compound interest, so AER is usually more accurate.

Earn a return with Wise Interest

A bank account isn’t the only way to manage – or grow – your money.

The Wise account is a fantastic alternative if you send money abroad, convert between currencies, or need an easy way to spend overseas. It’s not a bank account but offers some similar features.

You can also switch on Wise Interest** which lets you earn a variable return of up to 3.74%*** on your GBP balance. Unlike a typical savings account, your money is put to work by investing in a fund that holds government-guaranteed assets. It’s an effortless way to help your money grow while still enjoying the flexibility of Wise at home or abroad.

Here’s an overview of the main benefits of using Wise:
Fast and easy setup with no physical paperwork Low, upfront, transparent fees* and the mid-market exchange rates Dedicated support for large transfers Sophisticated security and anti-fraud measures, with your money safeguarded under regulatory protections Trackable and fast transfers to countries Low-cost spending in countries with the Wise card Earn a return on your GBP, USD and EUR balance with Wise Interest**

Here’s an overview of the main benefits of using Wise:

Fast and easy setup with no physical paperwork
Low, upfront, transparent fees* and the mid-market exchange rates
Dedicated support for large transfers
Sophisticated security and anti-fraud measures, with your money safeguarded under regulatory protections
Trackable and fast transfers to countries
Low-cost spending in countries with the Wise card
Earn a return on your GBP, USD and EUR balance with Wise Interest**

**Capital at risk. In the UK, Interest and Stocks are provided by Wise Assets — this is the trading name of Wise Assets UK Ltd, a subsidiary of Wise. Wise Assets UK Ltd is authorised as an investment firm and regulated by the Financial Conduct Authority (FCA). Our FCA number is 839689. We do not give investment advice, and you may be subject to pay tax. If you're not sure, seek qualified advice. You can find more information about the funds on our website.

***Capital at risk - past performance does not guarantee future growth. Variable rate is based on 7 day performance as of 14/05/2025. This fund has returned an 1.31% annual average over the last 5 years, excluding Wise fees. For the full 5 year past performance of funds, please visit our website.

And that’s it - your crash course in Annual Equivalent Rate (AER) and what it all means. After reading this, you should be better equipped to compare savings accounts and ISAs, and find the highest-paying account for you.

*Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information.

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.

We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.