What is gross interest and why does it matter?

Gross interest: at a glance

What do I need to know? Gross interest is the total amount your savings deposits earn before deductions.
What does it mean for me? Calculating gross interest shows your earnings before tax or charges, helping you work out your final return.
Why does it matter? Opening a range of different accounts with high gross interest rates can increase your wealth and protect against risk.

Spreading your wealth across different accounts with high interest rates can help you grow your money and protect against risk. Gross interest is one way to compare the earning potential of different accounts, though it does have limitations.

In this guide, we explain what gross interest is and how it can help you get more from your savings. You’ll learn how it works and how to calculate how much you could earn.

What is gross interest?

Gross interest is the total amount you earn on your savings deposits before any deductions, like tax.

Calculating gross interest - rather than net interest - strips out costs like tax and fees. This gives you a clear and comparable way of working out how these charges will impact your final earnings.

Knowing the gross interest earned on your money also means you can plan exactly how much tax you’ll need to pay.

This is especially important for additional-rate taxpayers, who aren’t entitled to a tax-free savings allowance.

Gross interest can also apply to the amount you owe on outstanding credit.

How does gross interest work?

Banks offer interest payments on your savings to encourage you to deposit cash with them. They need to strike the balance between offering attractive rates and keeping their interest payments to customers low, so that they can maximise their own profits.

Gross interest can be paid monthly, quarterly, annually, or at maturity (when a set time period ends). If your interest compounds, you earn on both the money you've saved and the interest you earn - increasing the gross total (more on this later).

Your final gross interest payment depends on the size of your deposit, the length of the term, how often the interest is applied, and the type of rate.

The important thing to remember with gross interest is that it is a pre-tax calculation. The gross interest you earn will be taxed at your marginal income rate, minus any allowances.

As additional-rate taxpayers aren’t entitled to any tax relief on savings interest, it’s especially important to compare accounts for the best rates. Even small differences can add up to meaningful gains over time.

It can also be helpful to explore ways to diversify your savings across account types. For example, ISAs offer tax-free interest on deposits up to £20,000 each year. After this, it’s important to look for accounts that offer the highest interest rates to maximise your return.

So, it’s always worth comparing a range of accounts from different providers to find the best rate for you. As there’s no limit to the number of accounts you can open, you could combine the benefits of a handful of savings options into a cash portfolio.

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The gross interest formula

You can calculate your gross interest using the following formula:

Gross interest = your deposit amount x the interest rate (as a decimal) × time in years

For example, if you deposit £50,000 into an account offering 5% gross interest for one year, the calculation would be:

50,000 x 0.05 x 1 = 2,500

So, you’d earn £2,500 in gross interest after one year of depositing. Additional-rate taxpayers would pay 45% tax on this amount, leaving you with £1,375.

If the account offers compound interest, your gross earnings will be higher. You can calculate how much compound interest you could earn using the Annual Equivalent Rate (AER).

This is because AER factors compound interest into calculations. So, in the above example, if the interest is compounded monthly, you’d earn £2,563 in gross interest after a year.

Frequently asked questions about gross interest

Is AER better than gross interest?

AER and gross interest are both helpful for calculating how much interest you could earn from a savings account or investment. The difference is that AER factors in how much compound interest you could earn if you don’t touch your money.

Gross interest is helpful for directly comparing how much you could earn with different accounts. AER can help you calculate which accounts offer better compounding interest.

Comparing cash savings with gross interest

Gross interest is a helpful indication of how much you could earn on your savings. It also lets you compare different rates and accounts to find the best ways to grow your cash.

Dividing your wealth across different accounts with high gross interest rates can help you earn more and minimise risk.