Glossary · UK
What is Compound Interest?
Interest earned on both your original money and the interest already added to it.
Full Definition
Compound interest is interest calculated on your initial capital plus the interest that has already accrued, so a balance grows faster over time than with simple interest. The more frequently interest compounds (yearly, monthly, daily) the larger the final amount. It is the core mechanism behind savings accounts, ISAs and long-term investment growth, and equally behind the cost of debt such as credit cards. Regular contributions compound too, which is why starting to save early has an outsized effect.
How Compound Interest is calculated
A = P x (1 + r / n) ^ (n x t)- A
- Final amount.
- P
- Principal (starting balance).
- r
- Annual interest rate as a decimal (e.g. 0.05 for 5%).
- n
- Number of times interest compounds per year.
- t
- Number of years.
Worked example: GBP 10,000 at 5% compounded yearly for 10 years: 10,000 x (1 + 0.05) ^ 10 = GBP 16,289, of which GBP 6,289 is interest.
Related Calculators
See Also
Disclaimer: Definitions are for guidance only. For decisions about your tax, savings, property or pension situation, always consult a qualified professional or refer to gov.uk.