UK savings and investment guide · Last reviewed 25 July 2026

Compound interest: how money can grow over time

Compound interest means growth is added to a balance and can itself earn further growth in later periods. Time, the rate, contributions and costs all affect the result, so a projection is only as useful as the assumptions behind it.

Compound interest versus simple interest

Simple interest is calculated only on the original amount. If £10,000 earned 5% simple interest each year, it would add £500 every year.

Compound interest is calculated on the original amount and growth already added. At a fixed 5% compounded annually, £10,000 becomes £10,500 after one year and £11,025 after two because the second year’s growth is calculated on £10,500.

Why compounding frequency matters

A nominal annual rate can be divided and applied daily, monthly, quarterly or annually. More frequent compounding can produce a higher effective annual rate when the same positive nominal rate is quoted, because growth is added sooner within the year.

The effective annual rate expresses the combined effect after one year. For example, a 5% nominal annual rate compounded monthly has an effective annual rate of approximately 5.12%. When comparing savings accounts, check whether the advertised figure is a nominal rate or an Annual Equivalent Rate.

Regular contributions and timing

Regular contributions can eventually represent more of the final balance than the starting amount. Each contribution has its own time to grow, so money added earlier generally has longer to compound than money added near the end.

A beginning-of-period contribution receives growth during that period in the calculator. An end-of-period contribution does not start growing until the following period. Increasing contributions over time can also materially change a long projection.

Worked example

Start with £10,000, add £200 at the end of every month and use a fixed 5% nominal annual rate compounded monthly for 10 years. The model projects a final balance of about £47,527.

The starting amount and monthly contributions total £34,000. The remaining £13,527 is modelled interest. This assumes the rate never changes and excludes fees, tax, withdrawals and inflation.

Try your assumptions in the Compound Interest Calculator

Savings interest is not the same as an investment return

A savings account may quote a rate, although that rate can be variable and the product may have access or balance conditions. An investment return is uncertain: values can rise or fall, and returns do not arrive as the smooth positive percentage shown by a compound-interest projection.

Do not treat a higher entered rate as a prediction. If a projection is being used for investment planning, compare a cautious range of outcomes and consider whether the underlying investment risk is appropriate.

Fees, tax and inflation

Percentage charges reduce the amount left to compound, so even a small annual fee can have a substantial cumulative effect over a long period. Fixed fees can weigh more heavily on smaller balances. The Compound Interest Calculator does not deduct either type.

Savings interest and investment returns can also be taxable depending on the account, investment wrapper and personal circumstances. Inflation reduces what a future balance can buy: a balance can grow in pounds while producing much less growth in purchasing power.

Use assumptions carefully

Check whether the entered rate is nominal or effective.
Match the compounding and contribution frequency to the product or scenario.
Include only contributions you can reasonably maintain.
Run lower-rate scenarios instead of relying on one optimistic outcome.
Consider fees, tax, inflation, withdrawals and access requirements separately.

Related calculators

Independent information

This guide is educational information, not a savings-product recommendation, investment advice or a guaranteed forecast.