How much interest will £2,500 earn in savings?

Interest on £2,500 at different rates

The rate on a savings account is quoted as a yearly figure (AER), which already includes the effect of interest being added during the year. The table shows one year of interest and the balance after one and five years with nothing added or taken out.

Tax on your interest

At 4%, £2,500 earns £100.00 a year. That is within the £1,000 allowance for a basic-rate taxpayer, so no tax would be due.

Basic-rate taxpayers can earn up to £1,000 of savings interest tax-free (the Personal Savings Allowance), higher-rate taxpayers £500 and additional-rate taxpayers none. People with low other income may also have a starting rate for savings band of up to £5,000. Interest in an ISA is always tax-free.

What if you add a little every month?

Adding £100 a month to £2,500 at 4% would take the pot to about £9,660 after five years, compared with £3,042 with no top-ups. You would have paid in £8,500 of that.

How to get a better rate

• Compare easy-access, notice and fixed-rate accounts: fixed accounts usually pay more but lock the money away.
• Check whether the headline rate is a short-term bonus that drops after a year.
• Switch when your rate falls: banks often cut rates on old accounts.
• Use your ISA allowance each year so that interest stays tax-free.
• Keep an emergency fund of three to six months of spending in an instant-access account.