AER interest on business bank accounts: what it means and why it matters

If you’ve ever looked at a business savings account and seen “1.75% AER,” you might’ve wondered what that really means. AER, short for Annual Equivalent Rate, shows the actual interest rate you'd earn over a year, factoring in compounding periods and how often interest is added.

For business owners comparing different savings accounts, understanding AER helps you make smarter decisions. This article breaks down how AER works, how it’s calculated, and what to check before selecting an account.

What does AER mean on a business account?

AER stands for Annual Equivalent Rate. It’s the figure that shows how much interest you’d earn on your balance over a full year, taking into account the compounding frequency and the gross rate.

This is especially useful when comparing accounts that pay interest quarterly or monthly. One might list a higher gross rate but compound less often, which could reduce the total interest earned.

The AER gives a better comparison between financial products because it reflects:

• The effective annual interest rate
• The impact of different compounding frequencies
• The total return over a year based on stated interest terms

When you're evaluating different savings options, this is the number to watch.

How AER is calculated

Calculating AER involves taking the gross interest rate and factoring in how often that interest is added to the account. The more frequent the compounding periods, the higher the total interest earned.

Let’s say a business savings account pays 3.33% gross rate, and offers bonuses for regular activity or switching, increasing the rate to 4.33% AER. This reflects the effective annual interest rate not just the nominal rate and assumes funds stay in the account and compound regularly.

The formula also accounts for how many times interest is added monthly, quarterly, or annually. These different frequencies make a difference when comparing selected accounts with similar terms.

If you're new to business banking or evaluating digital options, check out Digital business banking for SMEs: how tech-first banks are changing the game for how tech-first tools can help you manage and monitor finances more efficiently.

Why AER matters when comparing business bank accounts

Without AER, it’s hard to compare business savings accounts fairly. Two financial institutions might advertise the same gross rate but can have different compounding periods. One may pay interest quarterly, the other monthly. AER reveals the difference between them by standardising returns.

This helps business owners:

• Understand the real return on a deposit
• Avoid misleading headline figures
• Compare savings options on the same terms

If your business is considering different investment products or looking for regular access to funds, AER can guide you toward better financial outcomes over a year.

How business savings accounts use AER

Most business savings accounts display both the AER and the gross rate. This allows you to estimate how much interest you’ll earn on your deposits, assuming funds remain in place for the full compounding cycle.

Some providers offer tax-free savings products like cash ISAs to sole traders or partnerships. While these aren't typically used for business purposes, it’s good to understand the tax differences.

It’s also important to know:

• When your next interest payment is scheduled
• Whether interest is paid monthly, quarterly, or annually
• What the previous interest amounts were, if shown

Knowing how often your account earns interest and when it’s added gives you better visibility of potential growth.

Questions to ask when reviewing interest on business accounts

When reviewing business savings accounts, it helps to ask:

• Is the AER fixed or variable?
• Is it an introductory rate or ongoing?
• Are there any monthly fees that reduce your actual interest?

You should also ask about how much tax might apply to the interest earned. Business accounts typically don’t offer tax-free savings, so check with your accountant to see how the income from savings will be treated.

Finally, consider whether the AER interest rate is paid on all balances or only above a threshold. These other factors can affect which savings option is right for you.

How interest builds over time in a savings account

Interest grows based on how often it’s added. Some accounts pay interest monthly, others quarterly or just once a year. The more often it’s added to your balance, the more that interest can earn interest.

This compounding effect increases your return over time, especially if your business is making regular deposits.

Let’s say you start saving with a flexible account and add funds each month. The interest earned will rise each time, as the balance gets larger and benefits from compounding. That’s why the difference between AER and gross rate really matters.

Checking when your next interest payment is due and how the AER interest rate is applied helps you forecast your actual return more accurately.

Things to check before opening a business savings account

Before opening an account, confirm whether:

• The interest is a fixed or variable rate
• You can withdraw money without penalties
• The account is covered by the Financial Services Compensation Scheme (FSCS)

Make sure you understand the nominal rate versus the AER, especially if the compounding frequency differs between products. Also check the minimum balance required to earn interest, as some investment options may restrict earnings below certain thresholds.

If your goal is to maximise interest earned while maintaining regular access, look for accounts with higher AER and shorter compounding intervals.

Final thoughts

AER isn’t just a number on a rate sheet. It’s a clear way to compare how much your business cash could earn over a year factoring in compounding, payment frequency, and other conditions that affect your return.

Understanding how AER works, what impacts it, and how it compares to the gross rate gives you better control over your financial planning.

Business savings that work harder for your balance

Allica’s Business Rewards Account comes with instant-access Savings Pot that pays competitive AER interest rates, backed by smart tools and FSCS protection of up to £85,000 for eligible deposits.

You’ll also get up to 1.5% cashback* on eligible card spend, real-time alerts, and support from a dedicated relationship manager who understands your financial goals.

Whether you're starting to build reserves or looking for a better return on surplus cash, it's built to help your business earn more interest, without locking your money away.

Open your Business Current Account today

* Cashback is variable based on eligibility and spend. See a full list of limits and fees here.

Links were live and information was correct at the time of writing the article.

Disclaimer: This is information – not financial advice or recommendation

The content and materials featured in this article are for your information and education only, and are not intended to take into consideration any particular recipients’ financial situation. The product details and interest rates referred to are correct at the time of writing.

The information does not constitute financial advice or recommendation and should not be considered as such. Allica Bank will not accept any liability for any loss, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.