How do I calculate compound interest?

Use the formula A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate (as decimal), n is the number of compounding periods per year, and t is the number of years.

How long does it take to double my money with compound interest?

Use the Rule of 72: divide 72 by your interest rate to estimate years to double. At 6% interest, money doubles in approximately 12 years (72 ÷ 6 = 12). At 4%, it takes about 18 years.

Compound Interest Calculator Guide: Grow Your Savings

Last updated: February 2026 | 12 min read

Albert Einstein allegedly called compound interest the "eighth wonder of the world," and for good reason. Understanding how compound interest works is one of the most important financial concepts you can master. This guide explains the mathematics behind compounding and shows you how to harness its power for your savings and investments.

Calculate Your Compound Interest

Use our free Interest Calculator to see how your money can grow.

What Is Compound Interest?

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only calculates interest on the original amount, compound interest allows your money to grow exponentially.

Simple Interest vs Compound Interest

Simple Interest: £1,000 at 5% for 10 years = £1,500
(Only earns interest on original £1,000)

Compound Interest: £1,000 at 5% for 10 years = £1,629
(Earns interest on interest too)

That's an extra £129 just from compounding!

Try Our Free Compound Interest Calculator

See how compound interest can grow your savings and investments over time. Get instant results with our Compound Interest Calculator. You may also find our Interest Rate Calculator, Savings Calculator and Investment Calculator useful.

The Compound Interest Formula

A = P(1 + r/n)^nt

Where:
A = Final amount
P = Principal (initial investment)
r = Annual interest rate (as decimal)
n = Number of times interest compounds per year
t = Number of years

Example Calculation

You invest £10,000 at 5% annual interest, compounded monthly, for 10 years:

A = 10,000 × (1 + 0.05/12)^12×10
A = 10,000 × (1.004167)¹²⁰
A = 10,000 × 1.6470
A = £16,470.09

Your £10,000 grows to £16,470.09 over 10 years, earning £6,470.09 in interest!

Compounding Frequency Matters

How often interest compounds affects your returns:

Frequency	Times/Year (n)	£10,000 at 5% for 10 years
Annually	1	£16,288.95
Semi-annually	2	£16,386.16
Quarterly	4	£16,436.19
Monthly	12	£16,470.09
Daily	365	£16,486.65
Continuously	∞	£16,487.21

Daily compounding earns nearly £200 more than annual compounding over 10 years!

The Rule of 72

Want a quick way to estimate how long it takes to double your money? Use the Rule of 72:

Years to Double = 72 ÷ Interest Rate

Interest Rate	Years to Double
2%	36 years
3%	24 years
4%	18 years
5%	14.4 years
6%	12 years
7%	10.3 years
8%	9 years
10%	7.2 years

The Power of Starting Early

Time is the most powerful factor in compound interest. Starting early makes a dramatic difference:

£200/month at 7% annual return

Start at 25, retire at 65: £525,000
Start at 35, retire at 65: £243,000
Start at 45, retire at 65: £104,000

Starting 10 years earlier more than doubles your final amount!

UK Savings Accounts and Compound Interest

Different UK savings products compound interest differently:

Account Type	Typical Compounding	Tax Status
Instant Access Savings	Annual (AER)	Taxable (PSA applies)
Fixed Rate Bonds	Annual or at maturity	Taxable (PSA applies)
Cash ISA	Annual (AER)	Tax-free
Stocks & Shares ISA	Varies (dividends reinvested)	Tax-free
Premium Bonds	No interest (prize draws)	Tax-free
NS&I Income Bonds	Monthly	Taxable

Understanding AER

AER (Annual Equivalent Rate) shows the effective annual interest rate after accounting for compounding frequency. When comparing savings accounts, always compare AER, not the gross rate.

Compound Interest with Regular Contributions

Adding regular contributions supercharges compound growth:

Future Value with Regular Payments:

FV = P(1+r)ⁿ + PMT × [((1+r)ⁿ - 1) / r]

Where PMT = regular payment amount

Example: Regular Savings

Initial deposit: £5,000
Monthly contribution: £200
Interest rate: 5% AER
Time: 20 years

Final value: £95,530

You contributed: £5,000 + (£200 × 240) = £53,000
Interest earned: £42,530

The Impact of Fees on Compound Growth

Fees reduce your compound growth. Even small fees have a large long-term impact:

Annual Fee	£100,000 after 30 years at 7%	Lost to Fees
0%	£761,225	£0
0.5%	£661,437	£99,788
1%	£574,349	£186,876
1.5%	£498,395	£262,830
2%	£432,194	£329,031

A 1% annual fee costs nearly £187,000 over 30 years on a £100,000 investment!

Compound Interest and Inflation

Real returns account for inflation. If inflation is 3% and your savings earn 5%, your real return is approximately 2%.

Real Interest Rate ≈ Nominal Rate - Inflation Rate

Example: 5% interest - 3% inflation = 2% real return

For accurate long-term planning, use real (inflation-adjusted) returns in your calculations.

Tax-Efficient Compound Growth in the UK

Maximise compound growth with tax-efficient wrappers:

ISAs (Individual Savings Accounts)

£20,000 annual allowance (2025/26)
Interest and gains are tax-free forever
No need to declare on tax return
Can transfer between ISA types

Pensions

Tax relief on contributions (20-45% depending on tax band)
Tax-free growth inside the pension
25% tax-free lump sum at retirement
Lifetime allowance abolished from April 2024

Personal Savings Allowance

Basic rate taxpayers: £1,000 tax-free interest
Higher rate taxpayers: £500 tax-free interest
Additional rate taxpayers: £0 tax-free interest

Compound Interest Calculators: What to Look For

A good compound interest calculator should allow you to:

Enter initial deposit (principal)
Add regular contributions (monthly/annual)
Set compounding frequency
Adjust for inflation
Account for fees
Show year-by-year breakdown
Display charts/graphs

Common Compound Interest Mistakes

Starting too late: Time is your biggest advantage
Withdrawing interest: Let it compound for maximum growth
Ignoring fees: Small fees compound negatively
Forgetting inflation: Calculate real, not nominal, returns
Comparing wrong rates: Always compare AER, not gross rates

See Your Money Grow

Use our Interest Calculator to calculate compound interest on your savings!

Conclusion

Compound interest is one of the most powerful tools for building wealth. The key principles are simple:

Start early: Time magnifies compounding
Be consistent: Regular contributions accelerate growth
Minimise fees: Every percentage point matters
Use tax wrappers: ISAs and pensions protect your growth
Be patient: Compounding rewards long-term thinking

Whether you're saving for a house deposit, your children's education, or retirement, understanding compound interest helps you make better financial decisions and set realistic goals.

Compound Interest and UK Savers: Key Facts

The UK savings landscape has changed significantly in recent years. According to the Bank of England, UK households held over 2 trillion pounds in deposits as of 2025, yet many savers fail to maximise their returns through compounding. The Financial Conduct Authority (FCA) estimates that roughly 8.6 million easy-access savings accounts in the UK pay interest rates well below the best available deals, costing savers billions in lost compound growth every year.

The introduction of the Personal Savings Allowance in April 2016 was a game-changer for UK savers. Basic rate taxpayers can now earn up to 1,000 pounds in savings interest tax-free each year, meaning more of your interest stays invested and compounds. For those who maximise their ISA allowance of 20,000 pounds per year, all interest is permanently shielded from tax, creating an ideal environment for long-term compound growth. The FCA actively encourages UK consumers to compare AER rates and switch to better-paying accounts, as even a 0.5% difference compounds dramatically over a decade.

Frequently Asked Questions About Compound Interest

Is compound interest taxable in the UK?

Yes, interest earned outside of an ISA or pension wrapper is potentially taxable. However, the Personal Savings Allowance lets basic rate taxpayers earn up to 1,000 pounds and higher rate taxpayers up to 500 pounds in interest tax-free each year. Interest earned within a Cash ISA or Stocks and Shares ISA is completely tax-free with no limit, making ISAs the ideal vehicle for long-term compound growth.

What is the best UK account for compound interest?

For tax-free compounding, a Cash ISA or Stocks and Shares ISA is typically the best choice, as all returns are sheltered from income tax and capital gains tax. For longer-term growth, workplace pensions benefit from employer contributions and tax relief, amplifying the compounding effect. Regular saver accounts from high street banks often offer higher introductory rates, though these are usually limited to 12 months and capped at modest monthly deposits.

How does inflation affect compound interest savings in the UK?

Inflation erodes the real purchasing power of your savings. If your savings account pays 4% interest but UK inflation (measured by CPI) is 3%, your real return is only about 1%. During periods of high inflation, such as 2022-2023 when UK CPI exceeded 10%, many savers experienced negative real returns despite nominal interest. To protect against this, consider diversifying into assets that historically outpace inflation over the long term, such as equities held within a Stocks and Shares ISA.

UK Calculator Financial Team

Our team of financial experts creates accurate, easy-to-use calculators and guides to help you make informed decisions about your money.

Maximising Compound Interest: A UK Saver's Action Plan

For UK savers looking to make the most of compound interest, having a structured approach is essential. Financial advisers regulated by the FCA consistently recommend a hierarchy of savings and investment vehicles to maximise compound growth while minimising tax drag. The first priority for most UK savers should be contributing enough to their workplace pension to capture the full employer match, as this represents an immediate 100% return before any investment growth or compounding takes effect. The average UK employer match is 3% of qualifying earnings, and failing to contribute enough to receive the full match is effectively leaving free money on the table.

After maximising the employer pension match, UK savers should consider using their annual ISA allowance of 20,000 pounds. Within the ISA wrapper, interest, dividends, and capital gains all compound completely tax-free, making it the most efficient vehicle for long-term wealth building available to UK residents. For savers with a time horizon of five years or more, a Stocks and Shares ISA invested in a diversified global equity index fund has historically delivered average annual returns of approximately 8 to 10% before inflation, dramatically outpacing the returns available from Cash ISAs. Low-cost index funds from providers such as Vanguard, HSBC, and Legal and General, available through platforms like AJ Bell, Hargreaves Lansdown, and Interactive Investor, charge annual fees as low as 0.06 to 0.22%, minimising the drag on compound growth that higher fees create.

The Lifetime ISA (LISA) deserves special mention for UK savers under 40 saving for their first home or retirement. The government adds a 25% bonus on contributions up to 4,000 pounds per year (a maximum bonus of 1,000 pounds annually), and this bonus itself compounds alongside your savings. Over a 20-year period, the combination of government bonus and compound interest on a fully funded LISA can produce remarkably powerful results, particularly when invested in equities through a Stocks and Shares LISA rather than held as cash.

UK Savings Rates and FCA-Regulated Investment Platforms

Understanding how compound interest works is especially valuable for UK savers navigating the current interest rate environment. The Bank of England's base rate directly influences the savings rates offered by UK banks and building societies. Following the period of historically low rates that persisted from 2009 to 2021, the subsequent rate increases have made savings accounts more attractive for UK consumers. The Financial Conduct Authority (FCA) requires all UK savings providers to clearly display their interest rates, including whether they are fixed or variable, and to notify customers before any rate reduction takes effect. The FCA's Consumer Duty, introduced in 2023, further strengthens protections by requiring firms to deliver good outcomes for retail customers, which includes offering savings products that provide fair value.

For UK savers seeking to maximise the power of compound interest, the Financial Services Compensation Scheme (FSCS) provides an important safety net, protecting deposits of up to 85,000 pounds per person per FCA-authorised institution. This protection means that spreading savings across multiple providers allows UK consumers to protect larger sums while also potentially accessing the best available rates at each institution. Comparison services authorised by the FCA enable savers to quickly identify the highest-paying accounts, whether fixed-rate bonds for longer-term savings or easy-access accounts for emergency funds, ensuring that every pound benefits from the most competitive compounding rates available in the UK market.