How compound interest works
With simple interest you only earn interest on the money you put in. With compound interest, the interest you've earned is added to your balance, and next time you earn interest on that too. Over long periods, this "interest on interest" can end up bigger than the money you paid in.
For a single lump sum, the standard compound interest formula is:
P = starting amount, r = yearly rate, n = times interest is added per year, t = years
So £10,000 at 5% compounded yearly for 10 years grows to £10,000 × 1.0510 = £16,288.95. Compounded monthly, it grows to £16,470.09, because interest starts earning interest sooner.
How the calculator handles monthly deposits
The calculator works month by month. It converts your yearly rate into the matching monthly growth rate for the compounding you chose, grows the balance by that rate, and then adds your deposit at the end of each month. For lump sums this gives exactly the same answer as the formula above. For deposits, it means each payment starts earning from the month after you pay it in.
Worked example: £10,000 plus £100 a month
Using the calculator's default figures, £10,000 invested at 5% with interest added monthly, plus £100 a month for 10 years:
- Total paid in: £10,000 + (£100 × 120) = £22,000
- Final balance: £31,998.32
- Interest earned: £9,998.32
Keep it going for 20 years at 4% with interest added yearly, starting from £5,000 and saving £200 a month, and you'd pay in £53,000 and finish with about £83,724.
Does compounding frequency matter?
A little, but less than people think. The bigger factors are the interest rate and how long you leave the money. Here's £10,000 at 5% for 10 years:
| Compounding | Final balance | Equivalent AER |
|---|---|---|
| Yearly | £16,288.95 | 5.00% |
| Quarterly | £16,436.19 | 5.09% |
| Monthly | £16,470.09 | 5.12% |
| Daily | £16,486.65 | 5.13% |
This is why UK savings accounts must quote an AER (annual equivalent rate). It shows what you'd earn in a year once compounding is included, so you can compare accounts that pay interest monthly with ones that pay yearly. If an account already quotes an AER, enter it with yearly compounding.
The rule of 72
For a quick mental check, divide 72 by the interest rate to estimate how many years it takes to double your money. At 6% that's about 12 years; at 4% about 18 years. It works for any compounding asset, including pension funds. The pension calculator applies the same idea to your retirement pot.
Making compound interest work for you
- Start early. Ten extra years of growth often matters more than a higher monthly deposit.
- Use tax-free wrappers. Interest and growth inside an ISA aren't taxed, so all of the compounding stays with you. You can pay in up to £20,000 a year.
- Account for inflation. If prices rise 2% a year, a 5% return is really about 3% in spending power.
- Remember it works against you too. Debts compound the same way, which is why credit card balances grow so fast. See the credit card repayment calculator.
For a regular savings plan with a target amount, try the savings calculator.
Frequently asked questions
How much will £10,000 be worth in 10 years at 5%?
With interest compounded yearly, £10,000 at 5% grows to £16,288.95 after 10 years. With monthly compounding it grows to £16,470.09.
What is the difference between AER and interest rate?
The interest rate is the headline yearly rate. AER (annual equivalent rate) shows what you'd actually earn in a year once compounding is included, so 5% paid monthly is an AER of about 5.12%.
Is compound interest better daily or monthly?
Daily compounding pays very slightly more. £10,000 at 5% for 10 years ends at £16,486.65 compounded daily versus £16,470.09 monthly, a difference of about £17.
How long does it take to double money with compound interest?
Divide 72 by the yearly rate for a rough answer. At 5% your money doubles in about 14.4 years, and at 8% in about 9 years.
Do I pay tax on compound interest?
Interest on savings outside an ISA is taxable, but most people are covered by the Personal Savings Allowance of £1,000 for basic-rate taxpayers or £500 for higher-rate taxpayers. Interest inside an ISA is always tax-free.
Last reviewed October 2026 using 2026/27 figures. This calculator gives an estimate for guidance only.