Compound interest explained with UK examples (and a calculator)
What compound interest is, how it works on savings and investments, real examples of starting early, the rule of 72, and how fees and inflation eat into it. With a free calculator.
In this guideShowHide
How compound interest works
Simple interest pays you the same amount every year. Compound interest adds each year's growth to your pot, so the pot grows faster over time.
Example: £1,000 at 5% a year.
| Year | Simple interest | Compound interest |
|---|---|---|
| 1 | £1,050 | £1,050 |
| 5 | £1,250 | £1,276 |
| 10 | £1,500 | £1,629 |
| 20 | £2,000 | £2,653 |
| 30 | £2,500 | £4,322 |
The gap is small at first, then grows fast.
Before fees
Platform and fund
Growth is worked out monthly. Real returns go up and down from year to year and are not guaranteed. This does not adjust for inflation.
After 25 years
£112,150
- You paid in
- £61,000
- Growth
- £51,150
Starting early is the biggest advantage
Two savers each invest £200 a month at 5% a year until age 65:
| Starts at | Years investing | Paid in | Pot at 65 | |
|---|---|---|---|---|
| Saver A | 25 | 40 | £96,000 | About £296,000 |
| Saver B | 35 | 30 | £72,000 | About £163,000 |
Saver A pays in £24,000 more but ends up with about £133,000 more. Those extra ten years do most of the work.
These figures assume a steady 5% a year after fees, added monthly, the same method the calculator uses. Real returns go up and down.
The rule of 72
A quick way to estimate how long it takes money to double: divide 72 by the yearly return.
- At 4%: about 18 years
- At 6%: about 12 years
- At 8%: about 9 years
What works against compounding
- Fees: they come off every year, so they compound against you. A 1% difference in yearly fees can cost tens of thousands over a working life.
- Tax: use ISAs and pensions so growth is not taxed each year.
- Inflation: rising prices mean future pounds buy less. Take inflation off your expected return to think in today's money.
- Withdrawing early: taking money out resets the snowball.
Compound interest on savings vs investments
- Savings accounts compound interest, but rates are usually lower and may not beat inflation over the long term.
- Investments like index funds compound through growth and reinvested dividends. Returns are higher on average over long periods, but not guaranteed, and values can fall.
Common questions
How does compound interest work on a savings account?
Interest is added to your balance, monthly or yearly, and the next interest is worked out on the new, higher balance.
How much will £100 a month grow to in 20 years?
At 5% a year, around £40,600 from £24,000 paid in. Use the calculator above to try your own numbers.
Does compound interest work against you?
Yes, with debt. Unpaid credit card interest is added to your balance, and you are charged interest on the interest. Clearing expensive debt first is usually the best return available.
This is general information, not personal tax or financial advice. Tax rules change and depend on your circumstances, so check GOV.UK or speak to an accountant before acting.