Compound Interest Calculator

How is compound interest calculated?

Compound interest is calculated with the formula A = P(1 + r/n)^nt — interest is added to your balance each period, so you earn interest on your interest, not just on your original principal.

This is the single most powerful equation in personal finance. It is what makes starting early matter more than the amount you invest, because the earliest money compounds for the longest.

When you add regular contributions, the formula extends to include the future value of an annuity: PMT × [((1 + i)^N − 1) / i]. The calculator handles this automatically by simulating each month of your chosen duration — applying the effective periodic rate, then adding or subtracting your contributions.

How do you calculate compound interest step by step?

Apply the periodic rate to your balance, add the interest, then repeat for the next period.

Take £10,000 at 5% AER compounded monthly for 10 years. The effective monthly rate is 5% ÷ 12 = 0.4167%. After month one your balance is £10,000 × 1.004167 = £10,041.67; after month two, £10,041.67 × 1.004167 = £10,083.51. Each month the interest is slightly larger — you are earning interest on interest. After 120 months the balance reaches £16,470 without a single extra deposit, of which £6,470 is pure compound growth.

How much does £200 a month grow in 10 years?

Starting with £10,000 and adding £200 a month at 5% AER compounded monthly, you reach £47,526.55 after 10 years — the calculator's default scenario, which you can reproduce above.

Take Priya, a project manager in Leeds who opens a Stocks and Shares ISA with £10,000 and sets up a £200 monthly standing order. Over 10 years she contributes £34,000 in total (£10,000 start plus £24,000 of deposits), and compound interest adds £13,526.55 on top — 28.5% of her final balance generated by interest alone. A savings goal calculator that ignores compounding would understate her real potential by a wide margin.

Start the same plan five years earlier and the gap widens dramatically, because the earliest contributions compound for the longest. Those extra years at the beginning add far more than the same five years tacked on at the end.

How much will a lump sum grow with compound interest?

A one-off lump sum left untouched at 5% a year (compounded annually, no further deposits) grows as shown below. Because the growth is exponential, the final total roughly doubles across each extra decade — £10,000 becomes about £16,289 after 10 years but £43,219 after 30.

These are lump-sum figures with no monthly saving. Add regular deposits — the calculator's default £200 a month, for example — and the totals climb far higher. Change the amount, rate or timeframe in the tool above to model your own numbers.

Why do people underestimate compound interest?

Because of exponential growth bias — the human brain instinctively pictures growth as a straight line rather than an accelerating curve, so we consistently guess too low.

The bias is well documented: research by Stango and Zinman in the Journal of Finance found that people with stronger exponential growth bias save less, borrow more, and underestimate the long-run value of their investments. That gap between intuition and reality is precisely why running your own numbers through a calculator — rather than guessing — is so valuable.

How much interest can I earn before paying tax?

For the 2026/27 tax year, basic-rate taxpayers can earn £1,000 of savings interest tax-free, higher-rate taxpayers £500, and additional-rate taxpayers £0 — this is the Personal Savings Allowance (correct as of 2026-08-28, per GOV.UK).

The allowance covers interest from ordinary savings accounts, bonds and peer-to-peer lending — but not interest earned inside an ISA, which is always tax-free and sits outside the allowance entirely. With the Bank of England base rate held at 3.75% (correct as of 2026-08-28), easy-access accounts paying 4–5% mean a balance of around £20,000–£25,000 can now breach the basic-rate allowance in a single year — something far fewer savers had to think about when rates were near zero.

How does HMRC collect tax on savings interest?

Banks report the interest they pay you to HMRC after the tax year ends, and if you exceed your Personal Savings Allowance, HMRC usually collects the tax by adjusting your PAYE tax code rather than sending a bill.

That means the tax quietly comes out of your salary or pension over the following year, lowering your take-home pay — a surprise for savers who did not realise their interest had crossed the threshold. If you complete a Self Assessment return, you declare and pay it there instead. Either way, interest held inside an ISA never counts, which is why the wrapper matters more than ever.

What is changing for savers in April 2027?

From 6 April 2027 the Cash ISA limit for savers under 65 falls from £20,000 to £12,000, while savers aged 65 and over keep the full £20,000, and savings interest gets its own higher tax rates.

The new dedicated rates on taxable savings interest will be 22% for basic-rate, 42% for higher-rate and 47% for additional-rate taxpayers, per the GOV.UK rate-change guidance. The overall £20,000 ISA allowance is unchanged, so any balance above the reduced Cash ISA limit can still go into a Stocks and Shares ISA (see the ISA reform factsheet, correct as of 2026-08-28). If you rely on Cash ISAs, using this year's full allowance before the cut is worth considering — model it with the ISA calculator.

What does my compound interest result mean?

Your final balance is the end value of your pot; the interest share tells you how much of it came from growth rather than from your own contributions.

If compound growth is under 20% of your final balance, your time horizon is short or your rate is low. Over 30 years at typical equity returns of 6–8%, growth usually accounts for 60–75% of the total — meaning most long-term wealth comes from compounding, not from what you paid in. The "doubles in" figure applies the Rule of 72: if doubling takes more than 20 years, your real return is likely very low.

AER or gross — which rate should I enter?

Enter an AER only with yearly compounding selected, or a gross rate with monthly or daily compounding — never pair an AER with daily compounding, or you double-count the effect and overstate your result.

Gross interest is the flat nominal rate before compounding; the Annual Equivalent Rate (AER) already bakes in a full year of compounding. UK providers are required by the Financial Conduct Authority to quote AER so savers can compare accounts fairly. Because the AER has compounding built in, feeding it into a daily-compounding setting tells the maths to compound an already-compounded figure — a small but real source of inflated projections.

Why does inflation matter for real returns?

Because your real return is the interest you earn minus inflation — nominal growth flatters you whenever prices are rising.

With CPI inflation at 2.9% (correct as of 2026-08-28), a savings account paying 4.5% delivers a real return of roughly 1.6%, not 4.5%. Over decades the effect compounds too: Barclays' long-running Equity Gilt Study has repeatedly shown that cash tends to lose real value over long periods while a diversified equity portfolio grows it. Always ask what your final balance will actually buy, not just what the nominal number says.

Can I use this for irregular or freelance income?

Yes — average your annual surplus into an equivalent monthly figure, because the calculator assumes regular contributions.

If you are self-employed and save £6,000 in a good year but little in a lean one, entering £500 a month (£6,000 ÷ 12) models the same total. Freelancers and contractors who delay investing until income feels stable pay a real opportunity cost — even a three-to-five-year delay noticeably shrinks the final balance, because those are the years that would have compounded the longest.

What are the most common compound interest mistakes?

The biggest mistake is judging returns in nominal terms and ignoring inflation, tax, and fees — all three quietly erode what compounding builds.

A second error is treating the rate as the main lever and ignoring time; an extra five years at the start beats doubling contributions for five years at the end. UK savers can protect returns from tax by using an ISA (see the ISA calculator), while US investors can shelter up to $7,500 a year in a Roth IRA or defer up to $24,500 into a 401(k) for 2026 (correct as of 2026-08-28, per the IRS) so gains compound tax-free or tax-deferred.

Finally, many savers withdraw interest rather than reinvesting it — spend the interest and you are earning simple, not compound, interest. Use accumulation funds or accounts that credit interest back to the balance. To see how long a growing pot could then fund your spending, try the how long will my money last calculator or the FIRE calculator.