Gross/AER v's NET interest.

nicks

What is the difference between the 2? Which one do you calculate the interest using, as the AER is higher than the net interest?

Thanks

Nicks

tomstickland

The AER % is how much interest you'd earn over the year as a percentage of an initial amount put into the account.
eg: put £1 in and leave it all your and you'd have the £1 plus the AER interest in the account.

For a monthly payer then 1/12th of the gross amount is compounded 12 times.

The AER is potentially the more useful number.

nicks

Thanks....

Nicks

ManAtHome

It gets murkier - you normallly get Gross, AER, net of standard tax, and next of higher-rate tax...

As Tom said, AER is what you would get back over a year if the interest is credited into the account.

Gross is what you get - if it's annual interest, Gross and AER will be the same, if monthly interest, the gross will be lower than the AER. This is because you could withdraw the interest rather than leaving it in the account, so you don't get the compounded "interest on your monthly interest" (there is an explanation of compound interest on the main site by the way).

Net of standard tax is the gross rate less 20% (multiply by 0.8)
Net of higher-rate tax is the gross rate less 40% (multiply by 0.6)