🇬🇧 UK Compound Interest Calculator
The Power of Compound Interest in UK Savings
Compound interest means earning returns on both your principal and accumulated interest, creating exponential growth over time. A £10,000 investment at 5% annual return grows to £16,289 after 10 years (£6,289 gain), demonstrating how time multiplies wealth. Adding £200 monthly contributions transforms this dramatically—the same 10-year period yields £41,207 total (£10,000 initial + £24,000 contributions + £7,207 compound interest). The Rule of 72 estimates doubling time: divide 72 by interest rate (72÷5=14.4 years to double at 5%).
UK Cash ISAs currently offer 4-5% interest tax-free on up to £20,000 annual deposits. Marcus by Goldman Sachs pays 4.85% on easy-access savings (January 2025), turning £10,000 into £10,485 after one year. Monthly compounding accelerates growth compared to annual compounding—£10,000 at 5% monthly compounding yields £10,511.62 vs £10,500.00 annually compounded (£11.62 extra). Premium Bonds offer 4.4% prize rate but no guaranteed returns, while NS&I Direct Saver guarantees 4.75% with government backing. Fixed-rate bonds lock money for higher rates: 2-year fixes offer 4.7-5.0%, 5-year fixes reach 4.5-4.8%.
UK Investment Accounts for Compound Growth
Stocks & Shares ISAs provide tax-free compound growth on investments up to £20,000/year, sheltering dividends and capital gains from tax. FTSE All-Share historically returned 7.2% annually (including dividends), turning £10,000 into £20,096 over 10 years. Adding £500 monthly to S&S ISA at 7% returns accumulates £88,571 after 10 years (£60,000 contributed + £28,571 growth). Vanguard LifeStrategy 80% Equity Fund charges 0.22% annually, while FTSE Global All Cap Index Fund costs 0.23% offering worldwide diversification across 7,000+ companies.
Junior ISAs let parents invest £9,000/year for children tax-free until age 18. Investing £200/month from birth to 18 at 6% returns builds £82,870 university fund. Self-Invested Personal Pensions (SIPPs) add 25% tax relief—£800 contribution becomes £1,000 in pension (basic-rate taxpayer), while higher-rate taxpayers claim additional 20% through self-assessment. £300 monthly SIPP contribution for 30 years at 6% grows to £301,354. Dividend Allowance (£500 tax-free in 2025/26) and Capital Gains Allowance (£3,000) provide additional tax-efficient compound growth opportunities outside ISAs.
Maximizing Compound Returns: Frequency Matters
Compounding frequency significantly impacts returns—monthly compounding beats annual compounding over long periods. £10,000 at 6% for 20 years: annually compounded = £32,071, monthly compounded = £33,102 (£1,031 extra). Daily compounding adds minimal benefit over monthly in practice. Most UK savings accounts compound monthly or annually, while investment returns compound continuously through reinvested dividends. Reinvesting £400 quarterly dividends from £20,000 FTSE 100 investment (4% yield) grows portfolio faster than taking dividends as cash income.
Effective Annual Rate (EAR) reveals true return accounting for compounding frequency. 5% AER with monthly compounding = 5.12% actual annual return. Credit cards compound daily (typical 23% APR = 25.9% EAR), making debt expensive. Mortgage overpayments benefit from compound savings—paying £100 extra monthly on £200,000 mortgage at 4% saves £19,742 interest and clears mortgage 4 years early. Regular rebalancing maintains target asset allocation: selling winners buying losers forces "buy low, sell high" discipline while keeping compound growth on track through market cycles.
Common Compound Interest Mistakes to Avoid
Inflation erosion reduces real purchasing power of nominal returns. 5% interest with 3% inflation = 2% real return. £10,000 growing at 5% for 10 years reaches £16,289 nominally but only £12,144 in today's purchasing power after inflation. Index-linked savings certificates protect against inflation but currently unavailable to new investors. Equity investments historically outpaced inflation long-term—FTSE All-Share returned 5.1% above inflation annually since 1899. Regular savings accounts offering 1-2% interest lose purchasing power when inflation exceeds rates.
Withdrawing compound growth early destroys long-term wealth creation. Taking £2,000 from £20,000 investment growing at 6% annually costs £7,174 after 20 years (£2,000 becomes £6,414, but removing it prevents that growth plus compound effect on future contributions). High fees devastate compound returns—2% annual fund management fee vs 0.2% low-cost index fund on £100,000 over 30 years at 7% gross returns: high fee leaves £432,194, low fee leaves £700,918 (£268,724 difference). Early pension withdrawal before age 55 triggers 55% unauthorized payment charge plus income tax, eliminating compound growth potential. Start investing immediately rather than waiting for "perfect time"—£200/month from age 25-35 then stopping outperforms £200/month from age 35-65 due to extra compound years.