Answers · UK 2025/26
How does compound interest work in the UK?
Compound interest is interest earned on both your original deposit and the interest already accumulated. £10,000 at 5% compounded annually grows to £16,289 after 10 years and £43,219 after 30 years — the gain accelerates over time. Time in the market matters more than timing.
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UK compound interest mechanics. Formula: A = P(1 + r/n)^(nt) — A = final amount, P = principal, r = annual rate, n = compounding periods per year, t = years. Simple example: £10,000 at 5% annually compounded. After 1 year £10,500, after 5 years £12,763, after 10 years £16,289, after 20 years £26,533, after 30 years £43,219, after 40 years £70,400. The early years contribute little; the later years compound dramatically. Compounding frequency: monthly vs annually makes a small difference (5% annual = ~5.12% effective when compounded monthly). For UK savings (Cash ISA, savings account): rates 2025 typically 4.0-4.8% AER. AER (Annual Equivalent Rate) shows the true compounded annual return — always compare AER, not "Gross" or "Net" rates. Real return: subtract inflation. With CPI at ~2.6% and 4.5% AER, real return is ~1.9%/year. For investments (Stocks & Shares ISA): UK equity market historical real return ~5% over very long periods (Barclays Equity Gilt Study). £200/month for 30 years at 5% real = ~£170,000 in today's money. Pension wrap: contributions also get tax relief boost (basic 25%, higher 67%). The Rule of 72: divide 72 by your interest rate to estimate doubling time. At 6%, money doubles every 12 years; at 9%, every 8 years.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.