Learn to be a Financial Hunter - Not the Hunted
You Are Here: Home > Personal Finance > Banking & Saving > FAQ > Question and answer
Savings: What's the difference

between the Gross and Net interest rate

When a savings account is advertised the main focal point will be the interest rate offered, as an example 3%.

However you will not actually get paid 3%, because that is the Gross figure, ie the interest rate before tax has been automatically paid. For example -

  • Say you have £1,000 deposited in an account earning 3% a year
  • That equates to £30 in Gross interest
  • But all banks and building societies must automatically deduct 20% tax, so the sum you actually receive will be £24 with the balance of £6 being sent to the taxman
It is important to realise that the net interest is the actual sum that you will receive.
How to work out the net interest rate

Most savings accounts will also publish the net figure alongside the gross. If they don't it's a simple calculation whereby you take the gross rate and multiply it by 0.8, for example -

  • Gross rate of 5% x 0.8 = 4% net
  • Gross rate of 3.9% x 0.8 = 3.12% net
The net rate is lower for higher rate taxpayers
Higher rate taxpayers are taxed up to 40% and the net rate on their savings is lower than if they paid tax at the 20% basic rate. To work out their particular net rate the gross rate must be multiplied by 0.6.
  • Gross rate of 5% x 0.6 = 3% net
  • Gross rate of 3.9% x 0.6 = 2.34% net
Important - The net interest rate and tax-free savings accounts
Cash ISAs and other tax-free savings accounts offered by National Savings and Investments (NS&I) don't levy tax. This means their interest rates when advertised can be deceptive because all taxable accounts advertise the gross interest rate.

It can therefore get slightly confusing, for example -

  • The ABC Bank has a savings account that pays 5% gross
  • The bank also offers a tax-free Cash ISA which pays 4.25%
  • At first glance the first account paying 5% looks the better deal, but of course this is gross interest
  • So in order to compare this account against a tax-free ISA you have to convert its gross to net, which is 4% (5 x 0.8)
  • You can now easily compare which is the better home for your savings, and the Cash ISA at 4.25% versus 4% wins
Tax-free accounts are superb news for higher rate taxpayers
Higher rate taxpayers love tax-free accounts because most of the time they offer returns that cannot be beaten. For example -
  • If a bank offers a tax-free Cash ISA rate of 4.25% that equates to a Gross interest rate of 7.1%
  • To get this figure take the tax-free rate of 4.25% and multiply by 1.67
Not all people pay tax - so ask for interest to be paid Gross
Many pensioners are not in receipt of sufficient income to become liable to pay tax, therefore they are entitled to receive gross interest rather than net.

However, in order to achieve this it is necessary to inform the taxman by completing the Inland Revenue's R85 form - more help with the R85 form.

Gross and net interest are easy concepts to understand and if you're interested in your finances then read our 10 Laws of Good Personal Finance.

© 2019 LearnMoney.co.uk All rights reserved

The information on the LearnMoney.co.uk website has been compiled from sources believed to be reliable, but is not warranted to be accurate or complete.
All recommendations and comments are provided for general interest only and should not be construed as advice.
Professional advice should always be sought before buying or investing in any financial product.
The price of securities and any income from them can go down as well as up.
Past performance of a security or market is not necessarily indicative of future trends.
Any opinions and recommendations on LearnMoney.co.uk are given in good faith, but without legal responsibility and are subject to change without notice