📈 Compound Interest Calculator

Use our free Compound Interest Calculator to discover how your savings and investments can grow over time. Enter your initial deposit, monthly contributions, interest rate, and time horizon for an instant projection.

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What Is Compound Interest?

Compound interest is the process of earning interest on both your original capital and any interest already accumulated. It is the fundamental principle behind long-term wealth building and the reason financial advisers consistently recommend starting to save and invest as early as possible. The Bank of England has used compound interest principles in its monetary calculations for centuries.

In simple terms: your money earns returns, and then those returns earn their own returns. Over years and decades, this creates a snowball effect that can transform modest regular savings into substantial wealth.

The Compound Interest Formula

The mathematical formula is:

A = P × (1 + r/n)nt

  • A = final amount
  • P = principal (initial investment)
  • r = annual interest rate (as a decimal, e.g. 5% = 0.05)
  • n = compounding periods per year (12 for monthly, 4 for quarterly)
  • t = time in years

Practical Example with an ISA

Suppose you open a Stocks and Shares ISA with £5,000, contribute £200 per month, and achieve an average annual return of 5% compounded monthly over 25 years:

  • Total money invested: £5,000 + (£200 × 300) = £65,000
  • Estimated final value: approximately £127,000
  • Interest earned: approximately £62,000

Your investment nearly doubled thanks to compound returns, and all growth within an ISA wrapper is entirely tax-free.

Compound vs Simple Interest

With simple interest, £10,000 at 5% earns a flat £500 each year. After 20 years you would have £20,000. With compound interest, the same investment grows to over £26,500 without any additional contributions. The difference becomes far more pronounced over longer time frames and at higher rates.

Tips for UK Savers and Investors

  • Use your ISA allowance: the £20,000 annual ISA allowance shelters investment growth from both income tax and capital gains tax.
  • Maximise employer pension contributions: workplace pension matching is essentially free money that compounds over your career.
  • Reinvest dividends: choosing accumulation fund units rather than income units automatically reinvests dividends for compound growth.
  • Mind the fees: UK platform charges typically range from 0.15% to 0.45%. A difference of 0.3% compounded over 30 years can cost tens of thousands of pounds.
  • Start early: a 25-year-old investing £200/month at 5% will have roughly £230,000 by age 60. Starting at 35 yields only about £125,000. Ten years of extra compounding nearly doubles the result.

Compounding Frequencies

The frequency of compounding affects the effective annual rate (AER), which UK savings accounts are required to display by the FCA:

  • Annually: AER equals the nominal rate.
  • Quarterly: common for fixed-rate savings bonds.
  • Monthly: typical for most current accounts, Cash ISAs, and investment returns.
  • Daily: some online savings accounts and premium accounts use daily compounding.

At 5% nominal: annual compounding gives 5.00% AER; monthly gives 5.12% AER; daily gives 5.13% AER.

Frequently Asked Questions

What is compound interest?
Compound interest means earning interest on your interest as well as your original deposit. When interest is added to your balance, the next period's interest is calculated on the larger amount. Over time, this creates an accelerating growth curve.
Is interest earned in an ISA tax-free?
Yes. All interest, dividends, and capital gains earned within an Individual Savings Account (ISA) are completely free from UK income tax and capital gains tax. The annual ISA allowance is currently £20,000. This makes ISAs one of the most tax-efficient ways to benefit from compound growth.
What is a realistic rate of return for UK investments?
The FTSE All-Share index has historically returned about 7-8% per year including dividends, or roughly 4-5% after inflation. UK savings accounts currently offer 4-5% AER. Our calculator defaults to 5% as a moderate, achievable target for a diversified portfolio.
What is AER and why does it matter?
AER (Annual Equivalent Rate) shows the true yearly return after accounting for compounding frequency. It is the standardised rate the FCA requires banks to show so customers can compare products fairly. An account paying 4.89% monthly compounding actually gives 5.00% AER.
How does compound interest help with pensions?
Pension contributions benefit from compound growth over decades. With employer matching, you effectively start with a 100% return before compounding even begins. A 25-year-old contributing £300/month with 3% employer match at 5% growth could have over £400,000 by retirement age 67.
What is the Rule of 72?
The Rule of 72 is a quick way to estimate how long it takes to double your money: divide 72 by the annual interest rate. At 5%, your money doubles in roughly 72/5 = 14.4 years. At 7%, it doubles in about 10.3 years. It is an approximation, but a useful one for quick mental calculations.