Building Society AER vs Gross Interest Rate: Simple Guide

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UK Savings Interest Terms · Simple 2026 Guide

Building Society AER vs Gross Interest Rate: Simple Guide

When a UK building society advertises a savings account, you may see both AER and gross interest. They are connected, but they answer different questions. AER is mainly designed to help you compare savings accounts on a like-for-like annual basis, while the gross rate tells you the rate of interest before any tax that may be due is taken into account.

The two percentages are often identical when interest is paid once a year. They can look different when interest is paid monthly because AER includes the effect of compounding for comparison purposes. That is why a bond can legitimately show, for example, 4.45% AER but 4.36% gross for monthly interest.

See AER vs Gross View Real Examples How to Compare Accounts
Do not read “gross” as “tax-free”. UK banks and building societies generally pay ordinary savings interest without deducting Income Tax first, but you may still owe tax depending on your total savings interest and tax position. Cash ISA interest is treated differently because qualifying ISA interest is tax-free.

Meaningful editorial review: 22 September 2026. Definitions were checked against current UK building society explanations and HMRC guidance. Product rates shown below are dated examples used only to explain the terms.

AER vs Gross: The 20-Second Answer

AER Annual Equivalent Rate

AER shows an annualised rate that includes the effect of interest being added to savings and earning further interest. It is primarily a comparison figure.

Use AER when comparing the headline return of different savings accounts.

Gross Rate before tax deductions

Gross tells you the interest rate before Income Tax is deducted. Since April 2016, UK banks and building societies generally pay savings interest gross rather than deducting tax at source.

Gross does not mean the interest is automatically exempt from tax.

Simple memory trick: AER = comparison. Gross = before tax deduction. If interest is paid monthly, AER can be slightly higher than the quoted monthly gross rate because of the compounding assumption.

AER and Gross Interest: What Is the Difference?

Question
AER
Gross rate
Question What does it stand for?
AER Annual Equivalent Rate.
Gross Gross interest rate before tax deduction.
Question Main purpose
AER Makes savings accounts with different interest-payment frequencies easier to compare.
Gross Shows the underlying interest rate before tax is deducted.
Question Includes compounding effect?
AER Yes, where relevant to the annual-equivalent calculation.
Gross Not in the same annual-equivalent comparison sense.
Question Can it differ with monthly interest?
AER Yes. AER can be higher than the monthly gross figure.
Gross The monthly-payment gross rate can be slightly lower.
Question Does it mean tax-free?
AER No. AER says nothing by itself about tax status.
Gross No. Gross means tax has not been deducted from the payment.
Question Best figure for comparing savings rates?
AER Usually the most useful starting figure.
Gross Useful for understanding actual interest-payment terms and monthly or annual payment choices.
AER solves a practical problem: two accounts can pay interest at different intervals. Looking only at the raw gross percentages can therefore make one account appear better or worse simply because interest is credited at a different frequency.

What Does AER Mean on a Building Society Savings Account?

AER stands for Annual Equivalent Rate. Coventry Building Society describes it as showing how much interest savings earn over a year including the effect of compounding. Yorkshire Building Society describes AER as the rate if interest were paid and added each year.

Compounding means interest can itself earn interest after it has been added to the savings balance. AER puts that effect into one annual percentage so accounts can be compared more consistently.

Good for comparison AER is the figure to look at when comparing accounts whose interest may be paid annually, monthly or at another frequency.
Annualised figure It expresses the return on an equivalent yearly basis rather than simply showing the payment frequency.
Includes compounding assumption Where interest is credited more often than annually, AER reflects the effect of that interest earning further interest.
Not an access guarantee A high AER tells you nothing about withdrawals, fixed terms, penalties or monthly funding limits.

Official Coventry glossaryCoventry Building Society Savings Glossary

After opening this link:

  1. Find “Annual Equivalent Rate (AER)”.
  2. Read how Coventry explains compounding.
  3. Then find “Gross interest” to compare the two definitions.
  4. Use the glossary definitions before comparing Coventry product percentages.

What Does Gross Interest Mean?

Gross interest is the interest before tax is deducted. Coventry’s current savings glossary defines gross interest as interest earned before taxes are deducted, while West Brom describes gross as the rate payable before deduction of tax.

HMRC confirms that, since 6 April 2016, nearly all bank and building society savings interest has been paid without tax being deducted at source. That is why an ordinary savings account can say “gross” even though some customers may later owe Income Tax on part of the interest.

Gross does mean

  • The provider has not deducted Income Tax from the interest payment.
  • The rate is quoted before any tax liability personal to you.
  • The figure may be shown alongside AER.
  • Monthly and annual gross rates can differ on the same account.

Gross does not mean

  • The interest is automatically tax-free.
  • You definitely owe tax.
  • The account is a Cash ISA.
  • The gross figure is always the best comparison figure between providers.
“Paid gross” and “tax-free” are not the same sentence. Ordinary building society savings are generally paid gross. Qualifying Cash ISA interest is described as tax-free because ISA rules shelter that interest from UK Income Tax.

Real 2026 Examples: Why AER and Gross Can Match or Differ

Current building society products make the distinction easier to see than a formula alone.

Example 1: West Brom 5 Year Fixed Rate Bond

5.20% Annual AER West Brom’s current September 2026 issue displays 5.20% AER.
5.20% Annual gross If interest is chosen annually, the gross rate is also 5.20%.
5.08% Monthly gross If interest is chosen monthly, West Brom displays a lower 5.08% gross rate.
5.20% Monthly AER The monthly-interest option still shows 5.20% AER after annual-equivalent treatment.

The account therefore shows clearly why “monthly gross” and AER are not interchangeable figures.

Example 2: Principality 1 Year Fixed Rate Bond

4.45% Annual gross Principality’s current one-year bond offers 4.45% gross when interest is paid yearly.
4.45% Annual AER The yearly option therefore shows the same 4.45% AER.
4.36% Monthly gross The same bond shows 4.36% gross when interest is paid monthly.
4.45% Monthly AER Its annual-equivalent figure remains 4.45% AER.

Principality’s own annual-interest illustration says £1,000 would become £1,044.50 after 12 months under the stated assumptions.

Official West BromWest Brom Annual vs Monthly Rate Example

After opening this link:

  1. Scroll to the Summary Box.
  2. Find the Annual and Monthly columns.
  3. Compare AER with Gross under both payment choices.
  4. Notice that annual gross equals AER but monthly gross is lower.
  5. Read where monthly interest can be paid before choosing that option.

Official PrincipalityPrincipality 1 Year Bond Rate Example

After opening this link:

  1. Find “Choose how your interest is paid”.
  2. Compare the yearly 4.45% gross / 4.45% AER option.
  3. Compare it with the monthly 4.36% gross / 4.45% AER option.
  4. Read the estimated-balance example.
  5. Check the full Summary Box before using the figures to compare another account.

Why Is Monthly Gross Interest Sometimes Lower Than AER?

When interest is credited monthly, each interest payment can potentially begin earning interest itself if it remains in the savings arrangement. AER converts that effect into an annual-equivalent percentage.

The quoted monthly gross rate therefore does not need to equal AER. Providers can show a slightly lower gross rate for the monthly option while the annual-equivalent result remains the same as the annual-interest option.

1 Money earns interest

The provider calculates interest under the account’s stated method.

2 Interest is credited monthly

The account receives or pays an interest amount before the full year has passed.

3 Compounding can occur

Interest retained with the savings can itself contribute to future interest.

4 AER annualises the result

The effect is expressed as one comparable yearly rate.

Interest paid away is different in practice. If monthly interest is transferred to your current account and spent, it is not sitting in the savings account earning further interest. AER remains useful as the standard comparison figure, but your actual cash-flow pattern matters too.

When Are AER and Gross Usually the Same?

AER and gross commonly match where interest is effectively expressed on an annual basis without a different intra-year compounding effect that changes the equivalent rate.

Annual interest A bond showing 4.45% gross paid once each year may also show 4.45% AER.
Many straightforward variable savers Accounts frequently advertise one figure such as 4.20% Gross/AER when the provider’s payment structure makes the numbers identical.
Regular savers You may also see one identical Gross/AER figure, but remember the full year’s eventual deposits are not all present from day one.
An identical AER and gross figure does not mean the account is simple in every other respect. Check deposit limits, withdrawals, fixed terms, loyalty conditions and interest-payment dates.

When Are AER and Gross Different?

Monthly interest The most common example. The monthly gross figure can be lower while the AER remains equal to the annual-interest AER.
More frequent interest crediting Compounding within a year can make the annual-equivalent figure different from the underlying gross rate.
Different payment choices The same savings account can display one gross percentage for annual interest and another for monthly interest.
Do not treat the lower monthly gross percentage as an automatic penalty. First compare AER with AER. Then decide whether receiving interest monthly or annually better matches what you want to do with the interest.

AER vs Gross vs Tax-Free: Three Different Labels

Term
What it tells you
What it does not tell you
Term AER
Meaning Annual-equivalent return including compounding effects where relevant.
Does not tell you Whether interest is taxable or tax-free.
Term Gross
Meaning Interest before tax deduction.
Does not tell you Whether you personally owe tax later.
Term Tax-free
Meaning Interest is not subject to UK Income Tax under the relevant tax-free rules, such as a qualifying Cash ISA.
Does not tell you Whether the account pays the highest available rate or offers suitable access.
A Cash ISA will commonly show tax-free p.a./AER rather than describing the interest simply as gross. The AER is still useful for comparing its rate with other savings accounts, but tax treatment may change the practical comparison for some savers.

If Interest Is Paid Gross, Do You Still Pay Tax?

Possibly. The provider generally does not deduct tax first, but HMRC can still tax savings interest that falls outside the allowances and tax-free treatments available to you.

£1,000 Basic-rate PSA The 2026/27 Personal Savings Allowance remains £1,000 for basic-rate taxpayers.
£500 Higher-rate PSA The 2026/27 allowance remains £500 for higher-rate taxpayers.
£0 Additional-rate PSA Additional-rate taxpayers do not receive a Personal Savings Allowance.
Tax-free Qualifying ISA interest Qualifying interest inside a Cash ISA does not use the Personal Savings Allowance.
Gross is about how interest is paid, not your final tax bill. Add taxable savings interest across relevant accounts rather than looking at one building society in isolation.

Official HMRCCheck UK Tax on Savings Interest

After opening this link:

  1. Identify your Income Tax band.
  2. Check the savings allowance relevant to that band.
  3. Add taxable savings interest across your non-ISA accounts.
  4. Keep qualifying ISA interest separate.
  5. Follow HMRC’s instructions if your savings interest creates a tax liability.

How to Compare Two Building Society Savings Accounts Properly

AER is the starting point, not the whole decision. Two accounts with different rates may also have completely different access rules or funding limits.

1 Compare AER with AER

Do not compare one provider’s AER directly with another provider’s monthly gross figure.

2 Check fixed or variable

A variable AER may change; a fixed rate normally stays unchanged until a stated date.

3 Check funding pattern

A regular saver funded gradually is different from a lump-sum bond funded on day one.

4 Check access

Easy access, limited access, notice and fixed accounts solve different problems.

5 Check tax treatment

Ordinary gross interest and tax-free Cash ISA interest can have different value depending on your circumstances.

Compare the same type of rate: AER with AER.
Check whether the rate is fixed or variable.
Check annual versus monthly interest options.
Check whether interest stays in the account or is paid away.
Check minimum and maximum balances.
Check monthly contribution caps.
Check every withdrawal restriction.
Check the maturity date of a fixed account.
Check your likely savings-tax position.
Read the provider’s current Summary Box.
Best comparison sequence: AER → fixed/variable → access → deposit rules → tax treatment → interest-payment frequency. This prevents a small percentage difference from distracting you from a much bigger restriction.

Why AER Can Confuse People Comparing Regular Savers

AER is still the correct standard comparison figure, but a regular saver normally receives deposits gradually. If you plan to save £200 each month, the final £2,400 is not sitting in the account earning the advertised AER for the full year.

The first monthly payment earns interest for much longer than the final payment. This is why multiplying the maximum annual contributions by the AER can seriously overstate the actual interest you should expect from a regular saver.

Example of the mistake: a 6% AER regular saver funded monthly is not equivalent to depositing the eventual full balance into a 6% account on the first day of the year. Compare the provider’s own interest illustration where one is available.

Common AER and Gross Interest Mistakes

Comparing AER with monthly gross These are different measures. Compare AER with AER when assessing headline account returns.
Thinking gross means tax-free Gross means interest is paid before tax deduction. A personal tax liability may still arise.
Ignoring payment frequency A provider may show different gross rates for annual and monthly interest on the same account.
Ignoring paid-away interest Monthly interest sent to another account will not compound inside the original savings account.
Using AER as the only decision AER does not show withdrawal penalties, notice periods, deposit limits or eligibility.
Misreading regular savers Money added gradually does not all earn the displayed AER for a full year.
Ignoring ISA treatment A lower tax-free ISA AER may be relevant where taxable ordinary savings interest would otherwise exceed available allowances.
Using an old rate Product issue numbers and rates change. Use the live Summary Box immediately before opening an account.

AER and Gross in Different Savings Account Types

Account type
What to watch
Useful comparison
Type Easy access
Watch Variable rate and whether interest is annual or monthly.
Compare Compare AER first, then withdrawal freedom.
Type Fixed-rate bond
Watch Annual and monthly gross options may differ.
Compare Compare AER, maturity date and early-access rules.
Type Regular saver
Watch Monthly deposit limits mean the full eventual balance does not earn for a full year.
Compare Compare AER plus the monthly limit and provider illustration.
Type Cash ISA
Watch Interest is normally labelled tax-free/AER rather than simply gross.
Compare Consider tax-free AER plus access and ISA rules.
Type Monthly income account
Watch Gross monthly rate can be lower than AER.
Compare Compare AER first, then decide whether monthly cash flow matters.

Related Building-Society.org Savings Guides

These published guides show AER and gross rates in real savings products and can help put the definitions into context.

Nationwide Building Society Savings Rates 2026: Accounts & ISAs Coventry Building Society Savings Rates 2026: Accounts & ISAs Yorkshire Building Society Savings Rates 2026: Accounts & ISAs Skipton Building Society Savings Rates 2026: Accounts & ISAs West Brom Building Society: Savings, Mortgages & Online Services

Official AER, Gross Interest and Tax Sources

Coventry Savings Glossary Yorkshire Building Society Savings Terms West Brom Annual & Monthly Rate Example Principality Annual & Monthly Rate Example HMRC Savings Interest Tax Guide 2026/27 Tax Rates & Allowances HMRC Bank & Building Society Interest Guidance
After opening a building society product page: look for a section labelled “Summary Box”, “What is the interest rate?”, “Interest paid” or “Account terms”. That is normally where the provider separates AER, gross, tax-free, annual and monthly figures.

How This Guide Was Checked

Current Coventry AER definition checked.
Current Coventry gross-interest definition checked.
YBS AER and gross definitions checked.
West Brom annual/monthly rate example checked.
Principality annual/monthly rate example checked.
HMRC gross-payment position checked.
2026/27 Personal Savings Allowance checked.
Cash ISA tax distinction reviewed.
Published internal savings guides checked.

Editorial research date: 22 September 2026. The definitions are stable, but the example product rates can change or be replaced by later account issues.

Independent Financial Information Notice

Building-society.org is an independent informational website. It is not Coventry Building Society, Yorkshire Building Society, West Brom Building Society, Principality Building Society, HM Revenue & Customs or any financial adviser.

This page explains common UK savings terminology. It does not provide personalised tax or financial advice and does not decide which account is suitable for your circumstances.

Before opening an account: compare the live AER, gross or tax-free rate, interest-payment frequency, withdrawal rules, deposit limits and current Summary Box. A rate comparison without the account conditions is incomplete.

Building Society AER vs Gross Interest FAQs

1. What does AER mean on a building society savings account?

AER means Annual Equivalent Rate. It expresses the interest rate on an annual-equivalent basis and includes the effect of compounding where relevant. It is designed to make different savings accounts easier to compare.

2. What does gross interest mean?

Gross interest is interest before Income Tax is deducted. UK banks and building societies generally pay ordinary savings interest gross, but you may still have a personal tax liability depending on your total savings interest and tax circumstances.

3. Is AER the same as gross interest?

Not necessarily. The figures can be identical where interest is paid annually, but they can differ where interest is paid monthly. AER is an annual-equivalent comparison figure, while gross describes the interest rate before tax deduction.

4. Why is monthly gross interest lower than AER?

Monthly interest is credited more frequently. AER reflects the annual-equivalent effect of compounding, so a provider can quote a slightly lower monthly gross rate while showing a higher AER. Current West Brom and Principality fixed bonds provide real examples of this.

5. Should I compare AER or gross when choosing a savings account?

Use AER as the main rate when comparing savings accounts on a like-for-like annual basis. Then check the gross rate where relevant to monthly or annual interest payments, together with access rules, fixed terms, deposit limits and tax treatment.

6. Does gross interest mean tax-free?

No. Gross means the provider has not deducted tax from the interest. Tax-free normally refers to interest protected from Income Tax under specific rules, such as qualifying interest earned inside a Cash ISA.

7. Why are AER and gross sometimes exactly the same?

They commonly match where the account’s interest payment structure produces the same annual gross and annual-equivalent rate, such as many accounts paying interest once each year. Product terms should still be checked.

8. Does a higher AER always mean a better savings account?

No. A higher AER can come with a fixed term, fewer withdrawals, a monthly funding cap, a high minimum deposit or other restrictions. Compare the rate only after deciding how and when you need to access the money.

9. How does AER work on a regular saver?

The displayed AER remains the standard annual comparison rate, but regular-saver money is normally deposited gradually. The full eventual annual contribution therefore does not earn the advertised rate for the whole year, so the actual interest is lower than a simple full-balance calculation would suggest.

10. Do I pay tax if my building society pays interest gross?

You may. For 2026/27, the Personal Savings Allowance is £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers, while additional-rate taxpayers receive no Personal Savings Allowance. Qualifying Cash ISA interest is tax-free and does not use the allowance.

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