What is compound interest?

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, your returns generate their own returns. Over time this creates exponential growth — which is why starting early matters so much.

How often is interest compounded?

Common compounding frequencies are daily, monthly, quarterly, and annually. More frequent compounding produces slightly higher returns. For most UK savings accounts and ISAs, interest is compounded monthly or annually.

What is the Rule of 72?

The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by the annual interest rate to get the approximate number of years. At 6%, money doubles in roughly 12 years (72 ÷ 6). At 4.5%, it takes about 16 years. It works for any compounding growth — including inflation eating away at your savings.

Should I use an ISA or a pension for long-term savings?

Both are tax-efficient but work differently. A pension gives you upfront tax relief — a 20% taxpayer adding £800 gets topped up to £1,000 — but you can't access the money until age 57 (rising to 58 in 2028). An ISA gives no upfront relief but withdrawals are completely tax-free and you can access money at any time. For retirement savings, pensions win on tax efficiency; for medium-term goals, ISAs offer more flexibility.

🇬🇧 UK Financial Tools · 2026/27

Compound Interest Calculator
watch your money grow

See exactly how compound interest builds wealth — with or without regular contributions.

✓ Updated for 2026/27 tax year ✓ Uses official HMRC tax bands ✓ No personal data stored ✓ Free — always

Compound Interest

Watch your money grow. Enter your investment details to see the power of compounding.

Initial Investment

Monthly Contribution

Annual Return Rate

Time Period (Years)

20y

Compounding Frequency

Growth Projection

Live

Final Balance

£—

Total Contributed—

Interest Earned—

Growth Multiple—

Effective Annual Rate—

Contributed vs Returns

Contributions Returns

📈

Open a Stocks & Shares ISA

Put compound growth to work tax-free with a UK Stocks & Shares ISA. (affiliate link)

Compare ISAs →

How compound interest works — and why it matters

Compound interest is one of the most powerful forces in personal finance. Unlike simple interest, which is calculated only on your original deposit, compound interest is calculated on your principal plus all the interest you've already earned. The result is growth that accelerates over time — which is why starting early matters far more than investing large amounts later.

The formula is A = P(1 + r/n)^(nt), where P is your starting principal, r is the annual interest rate, n is the number of times interest compounds per year, and t is the number of years. The more frequently interest compounds — daily versus annually — the higher your effective return, though the difference is modest in practice compared to the rate and time horizon.

Even a difference of 1–2% in annual return has an enormous effect over decades. £10,000 growing at 5% for 30 years becomes roughly £43,000. At 7% it becomes nearly £76,000. That £33,000 gap comes entirely from the compounding of a 2% rate difference — the original investment is the same.

Regular contributions amplify the effect

Adding a fixed monthly contribution transforms the calculation. Each new contribution starts earning compound returns immediately, effectively creating hundreds of smaller compounding pools all running simultaneously. This is the mathematical basis for why pension contributions made in your 20s are worth so much more than equivalent contributions in your 50s — not just because of the larger number of years, but because earlier contributions compound for longer.

Inflation and real returns

The nominal return shown by this calculator is the gross growth before inflation. If your savings earn 4% annually but inflation runs at 3%, your real return is only around 1%. For long-term planning, always consider whether your expected return meaningfully exceeds the rate of inflation — otherwise you risk your money losing purchasing power despite appearing to grow.

Where you'll find compound interest in practice

ISAs and pension funds grow through compound returns on invested assets. Savings accounts compound interest on your deposit. Credit cards and loans also compound — but against you. Understanding the mechanics helps you maximise growth on savings and minimise the cost of debt simultaneously.

Compound Interest Calculator — UK Guide

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It's often called the "eighth wonder of the world" because of how dramatically it accelerates wealth growth over time.

Formula: A = P(1 + r/n)^nt — where P = principal, r = annual rate, n = compounds per year, t = time in years.