Compound Interest Calculator

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This calculator shows how compound interest works on a fixed rate. For a complete financial picture that models your actual income, pension, ISA and spending and gives you personalised insights, try Saving Tool Advanced.

What is compound interest?

Compound interest is the process by which interest is earned not just on your original principal, but also on the interest you have already built up. Over time, this creates a snowball effect where your money grows at an accelerating rate, often described as "interest on interest".

Albert Einstein is often credited with calling compound interest the "eighth wonder of the world". Even modest, consistent returns compounded over decades can dramatically grow a relatively small starting amount.

How does compound interest work?

The idea is straightforward: each time interest is applied to your savings, it is added to the total. The next time interest is calculated, it is applied to a slightly larger amount. This means your money grows faster and faster over time, without you doing anything extra.

How often interest is applied (the compounding frequency) also matters. If interest compounds monthly rather than annually, your money grows slightly faster, because each month's interest starts earning its own interest a little sooner.

Compound interest and investing in the UK

Compound interest is the engine behind long-term investing in the UK. Whether you hold funds in a Stocks and Shares ISA (S&S ISA), a Self-Invested Personal Pension (SIPP), or a workplace pension, your investment returns are reinvested to generate further returns.

The annual ISA allowance in the UK is currently £20,000. Gains and income within an ISA are tax-free, making the ISA wrapper one of the most powerful tools for long-term compounding. Pension contributions also benefit from tax relief, effectively boosting your starting principal before compounding even begins.

The impact of regular contributions

One of the most powerful inputs in this compound interest calculator is your regular contribution. Even small monthly amounts of £100, £200 or £500 can dwarf the initial lump sum over a long enough period. This is why the advice to start saving early and consistently tends to beat waiting to save a larger amount later.

This principle is also why pension auto-enrolment works: regular contributions from both employer and employee are designed to maximise the compounding effect over a working lifetime.

Compound interest vs. simple interest

Simple interest is calculated only on the original principal. If you deposit £10,000 at 5% simple interest, you earn £500 every year regardless of how much has already accumulated. Compound interest earns interest on the growing total, so £10,000 at 5% compounded annually becomes £10,500 after year one, then £11,025 after year two, and so on. Over 20 years, the difference is substantial.

Notes

• Returns are not guaranteed. This calculator assumes a fixed annual rate throughout the investment period.
• Real investment returns vary and past performance is not indicative of future results.
• This calculator does not account for inflation, taxes on gains, or platform fees.
• For S&S ISA or pension growth projections with your actual figures, use Saving Tool Advanced.

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