Compound Interest
Calculator UK

What is compound interest?

Compound interest is interest worked out on your original money and on the interest it has already earned. That is the whole meaning in three words: interest on interest. Each time interest is added, the next payment is calculated on a slightly bigger balance, so your savings grow a little faster every year.

Put another way, the definition of compound interest is growth on growth. Simple interest pays the same amount every year because it only ever looks at the sum you started with; compound interest keeps raising the base it pays on. Over a few months the difference is pennies. Over twenty or thirty years it usually ends up as most of the final balance.

Compound interest is often called the "eighth wonder of the world", a line usually credited to Albert Einstein, although there is no reliable record of him ever saying it. Whoever said it first, the idea holds up, as the examples below show.

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% a year compounded monthly for 10 years. The 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.

If your bank quotes an AER rather than a gross rate, the monthly rate is a little lower, because the AER already includes a year of compounding: 5% AER works out at 0.4074% a month, not 0.4167%. To use an AER in the calculator, set compounding to Annually.

What is the difference between simple and compound interest?

Simple interest is paid only on the money you started with; compound interest is paid on that money plus all the interest already added. The table shows £10,000 at 5% a year both ways.

In year one there is no difference at all. After 30 years compounding has added £18,219.42 more than simple interest, more than doubling the interest earned. You only get compound interest if the interest stays in the account: spend it each year and you are effectively back on simple interest.

How do you calculate compound interest in Excel?

Excel and Google Sheets both have a built-in FV (future value) function that handles compound interest with monthly contributions in one cell:

The deposit and starting balance are negative because, in Excel's sign convention, money you pay in is cash leaving your pocket (see Microsoft's FV function guide). Three variations cover most spreadsheets:

• Lump sum only: =10000*(1+5%/12)^(12*10) returns £16,470.09. This is the compound interest formula A = P(1 + r/n)^nt typed straight into a cell.
• Deposits at the start of each month: add a final 1, as in =FV(5%/12, 120, -200, -10000, 1), which returns £47,655.95 because every deposit gets one extra month of interest.
• Your account quotes an AER: turn it into a monthly rate first with =(1+5%)^(1/12)-1 (0.4074%) and use that as the rate.

For a year-by-year table, put the opening balance in one cell and below it =previous balance*(1+5%/12)^12 + 200*((1+5%/12)^12-1)/(5%/12), then fill down. Or skip the spreadsheet: the calculator's Table view gives the same yearly and monthly breakdown.

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

Starting with £10,000 and adding £200 a month at 5% a year 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.

Daily, monthly or annual compounding: which is best?

More frequent compounding always earns a little more at the same headline rate, but the gap is small. Here is £10,000 at a 5% gross rate for 10 years, compounded at each frequency the calculator offers:

Daily compounding beats monthly by £16.56 over ten years, and monthly beats annual by £181.14. A savings account compounded daily is not automatically better than one compounded monthly or yearly: the AER column is what matters, and UK banks must show it so you can compare accounts that pay interest on different schedules. Pick the highest AER, then use the calculator to see what it is worth over your own timeframe.

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.

Does compound interest apply to stocks and shares?

Yes, though strictly it is compound growth rather than interest: shares and funds don't pay a fixed rate, but their returns compound in exactly the same way.

Your return from shares comes from dividends and from changes in price. When dividends are reinvested, they buy more shares or fund units, and those earn their own dividends and growth the following year. An accumulation ("Acc") fund does this for you automatically; with an income ("Inc") fund you have to reinvest the payouts yourself or the compounding stops. Price gains compound too, because each year's rise is measured from a higher starting value.

Using this as a Stocks and Shares ISA compound interest calculator

Enter an assumed average yearly return as the interest rate and set compounding to Annually, then add your monthly payment. Investing £500 a month for 25 years (£150,000 paid in) gives these illustrative results:

Two things stand out. First, a 0.5% yearly charge costs about £23,600 over 25 years, so fees compound against you just as returns compound for you. Second, inside a Stocks and Shares ISA none of this growth is taxed. In an ordinary investment account, dividends above the £500 dividend allowance are taxed at 10.75%, 35.75% or 39.35% in 2026/27 (per GOV.UK), and gains can face Capital Gains Tax, which slowly drags on compounding.

Real markets don't deliver a smooth rate. Returns swing from year to year, and the order of good and bad years changes the result, especially if you are paying in or drawing out. Treat a flat rate as a planning estimate, not a promise. To see what actually happened over real historical periods, try the S&P 500 calculator or the rolling returns simulator.

Can compound interest make you rich?

It can turn modest, steady saving into a large sum, but only with time. £300 a month for 40 years at an average 7% a year grows to about £741,500, from £144,000 paid in. Stop after 20 years and the same habit gives about £152,300; after 30 years, about £350,800. The last decade adds more than the first two combined, which is the exponential curve at work.

Keep it in perspective. At 2% inflation, £741,500 in 40 years' time buys roughly what £335,800 buys today. And a 7% average needs a mostly equity portfolio that will fall sharply in some years. Compound interest rewards patience more than cleverness: start early, keep fees low, reinvest the returns and don't interrupt it.

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 2026-10-10, 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 2026-10-10), 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 2026-10-10). 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.

Tick Show inflation-adjusted (real) value above the Calculate button to see this on your own numbers: the chart adds a nominal line and a real-value line that deflates each year-end balance by 2% a year, and the results show what your final balance would buy in today's money.

With CPI inflation at 2.9% (correct as of 2026-10-10), 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 2026-10-10, 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.