Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on both your initial deposit and the interest you've already earned. Unlike simple interest — which only accrues on your principal — compound interest means your money grows exponentially over time, often described as "interest on interest".

The formula is: A = P × (1 + r/n)^(n×t)

Where A is the final amount, P is your principal (starting balance), r is the annual interest rate as a decimal, n is how many times interest compounds per year, and t is the number of years. For example, £1,000 at 5% compounded monthly for 10 years: A = 1,000 × (1 + 0.05/12)^(12×10) = £1,647.

Question 2

How is compound interest different from simple interest?

Accepted Answer

Simple interest is calculated only on your original investment. Compound interest is calculated on your principal plus any accumulated interest. Over long periods, the difference is dramatic: £10,000 at 7% simple interest for 30 years grows to £31,000, but with annual compounding it reaches £76,000 — more than twice as much.

Question 3

Does inflation matter when calculating compound interest?

Accepted Answer

Inflation gradually reduces the real purchasing power of money. If inflation runs at 2.5%, a pot of £100,000 in 10 years will only buy what £78,000 buys today. Use the "Adjust for inflation" toggle to see the real value of your future pot in today's pounds — it's the most honest way to plan for retirement or long-term goals.

Question 4

What is a good rate of return to use?

Accepted Answer

The S&P 500 has historically returned around 10% annually (roughly 7% after inflation). For UK-focused investors, the FTSE All-World has averaged 7–9% historically. A conservative estimate for long-term planning is 5–7% per year. Always account for platform fees (typically 0.15–0.45%) and inflation when setting your expectations.

Question 5

Is compound interest tax-free in the UK?

Accepted Answer

Interest and investment returns are generally taxable in the UK. However, using a Stocks & Shares ISA or Cash ISA shelters up to £20,000 per year (2024/25 allowance) completely from tax. Growth, dividends, and withdrawals inside an ISA are all tax-free, making ISAs the most powerful tool available to UK savers and investors.

Question 6

How often should interest compound for the best returns?

Accepted Answer

The more frequently interest compounds, the faster your money grows. Daily compounding produces slightly more than monthly, which beats annual. In practice, the difference between daily and monthly compounding is small — on £10,000 at 5% over 10 years, daily compounding adds only about £12 more than monthly. The interest rate itself matters far more than compounding frequency.

Question 7

What is the Rule of 72?

Accepted Answer

The Rule of 72 is a quick mental shortcut to estimate how long it takes to double your money. Divide 72 by your annual interest rate: at 6%, your money doubles in roughly 12 years (72 ÷ 6). At 9%, it doubles in 8 years. It's a useful sanity check when planning long-term investments, though our calculator gives you the precise figure.

Question 8

How much should I save each month to reach my goal?

Accepted Answer

Work backwards: decide your target amount and timeline, then adjust the monthly contribution in this calculator until the future value matches your goal. As a rough guide, saving £200/month at 7% for 30 years produces around £227,000. Starting earlier has an outsized impact — the same £200/month started 10 years earlier nearly doubles the outcome.

Question 9

What is the best compound interest account in the UK?

Accepted Answer

Stocks & Shares ISAs offer the highest long-term compound growth potential, with historical returns of 7–10% annually. Cash ISAs and high-interest savings accounts offer lower but guaranteed rates, currently 4–5% (2024/25). For maximum compounding, reinvest all dividends and interest, minimise fees, and shelter as much as possible inside an ISA to avoid tax eroding your returns.

Year	Deposits	Interest earned	Balance
0	1,000	0	1,000
1	0	51	1,051
2	0	54	1,105
3	0	57	1,161
4	0	59	1,221
5	0	62	1,283

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Compound Interest Calculator

Input values

Results

Chart

Table

FAQs