Compound Interest Calculator
See how your savings grow over time with compound interest. Includes inflation adjustment for real returns and UK tax options.
Your savings details
Advanced options
Bank of England target is 2%. Set to 0 to see nominal returns only.
The power of compound interest
Einstein reportedly called compound interest the "eighth wonder of the world". The earlier you start and the longer you invest, the more powerful the effect.
Projected growth
Final balance after 10 years
£47,656
Worth £37,229 in today's money
Total contributions
£34,000
Interest earned
£13,656
Year-by-year breakdown
| Year | Balance | Interest | Real value |
|---|---|---|---|
| 1 | £12,977.62 | +£577.62 | £12,661.10 |
| 2 | £16,107.59 | +£729.96 | £15,331.43 |
| 3 | £19,397.68 | +£890.10 | £18,012.68 |
| 4 | £22,856.11 | +£1,058.43 | £20,706.51 |
| 5 | £26,491.48 | +£1,235.37 | £23,414.60 |
| 6 | £30,312.83 | +£1,421.36 | £26,138.66 |
| 7 | £34,329.70 | +£1,616.87 | £28,880.38 |
| 8 | £38,552.07 | +£1,822.38 | £31,641.48 |
| 9 | £42,990.47 | +£2,038.40 | £34,423.69 |
| 10 | £47,655.95 | +£2,265.48 | £37,228.75 |
Understanding compound interest
The compound interest formula
- A = Final amount
- P = Principal (initial deposit)
- r = Annual interest rate (decimal)
- n = Compounding frequency per year
- t = Time in years
Why inflation matters
Inflation erodes the purchasing power of money over time. A 5% return with 3% inflation gives you only ~2% real growth.
This calculator shows both nominal returns (the actual pounds) and real returns (what those pounds will buy in today's terms), helping you make better long-term financial decisions.
Compounding frequency comparison
See how different compounding frequencies affect £10,000 at 5% over 10 years:
| Frequency | Periods/year | Final amount | Effective rate |
|---|---|---|---|
| Annually | 1 | £16,288.95 | 5.00% |
| Semi-annually | 2 | £16,386.16 | 5.06% |
| Quarterly | 4 | £16,436.19 | 5.09% |
| Monthly | 12 | £16,470.09 | 5.12% |
| Daily | 365 | £16,486.65 | 5.13% |
Related tools
Frequently asked questions
What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (calculated only on the principal), compound interest grows exponentially over time, making it a powerful tool for long-term savings and investments.
How does the compound interest formula work?
The formula A = P(1 + r/n)^(nt) calculates the final amount (A) from principal (P), annual interest rate (r), compounding frequency (n times per year), and time (t in years). For example, £1,000 at 5% compounded monthly for 10 years becomes £1,647.01.
Why does compounding frequency matter?
More frequent compounding means interest is calculated and added to your balance more often, so you earn interest on interest sooner. Daily compounding yields slightly more than monthly, which yields more than annually. However, the difference is often small for typical savings rates.
What is inflation-adjusted return?
Inflation-adjusted (or "real") return shows what your money will actually be worth in today's purchasing power. If you earn 5% interest but inflation is 3%, your real return is approximately 2%. This calculator shows both nominal and real values so you can see the true growth of your savings.
How is savings interest taxed in the UK?
In the UK, most people have a Personal Savings Allowance (PSA): £1,000 for basic rate taxpayers, £500 for higher rate, and £0 for additional rate. Interest within your PSA is tax-free. Interest above this is taxed at your marginal rate. ISAs are completely tax-free.
What is the effective annual rate (EAR)?
The effective annual rate shows the true annual return when compounding is factored in. A 5% nominal rate compounded monthly has an EAR of 5.12%. This helps you compare accounts with different compounding frequencies on an equal basis.
How do monthly contributions affect compound interest?
Regular monthly contributions significantly boost your final balance through pound-cost averaging and additional compounding. Even small regular deposits can outperform larger lump sums over time due to the compounding effect on each contribution.
Is this calculator suitable for ISA calculations?
Yes, for ISA calculations simply turn off the tax toggle since ISA interest is tax-free. The calculator will show your gross returns without any tax deductions, which is exactly how ISAs work.