What is interest?
Definition of interest
Interest is extra money that is earned on savings, and extra money that has to be paid on certain debts.
Banks will pay interest to people who've saved money with them. They will also charge interest on money that's owed to them, such as on loans, overdrafts and mortgages.
Interest may also be charged by businesses to customers who owe them money and have taken longer than they should to pay.
Interest is usually quoted as x% per year or per month.
If interest paid to you is taxable income, it must be declared to HMRC on the Self Assessment tax return for the relevant year. Some interest however, such as interest earned on tax-free ISAs, is tax-free income and does not need to be declared.
Example of interest:
Tanya opens a savings account which pays 4% interest per year. She puts in £5,000 and does not touch it. By the end of the year Tanya will have earned:
£5,000 x 4% = £200 in interest.
Brian takes out a loan for £10,000 which charges 5% interest per month. At the end of each month, Brian will owe:
£10,000 x 5% = £100 in interest.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.