Compound interest is interest calculated on both your original principal and the interest that's already accumulated — meaning your money starts earning a return on its own returns, not just on what you originally put in.
Compound interest follows the formula A = P × (1 + r/n)^(n×t), where P is your principal, r is the annual rate, n is how often it compounds per year, and t is time in years. The variable that matters most, by far, is time — someone who starts investing years earlier ends up with significantly more than someone who starts later with the same monthly contributions, even if they invest for fewer total years.
Use the Compound Interest Calculator on this site to see exactly how your own numbers play out over time, including a year-by-year breakdown.
In the UK, the account you hold your investments in changes how much of that compound growth you actually keep. A Stocks & Shares ISA shelters all growth from tax completely — no Income Tax on interest or dividends, no Capital Gains Tax, ever, up to your £20,000 annual ISA allowance. A General Investment Account, by contrast, is taxable each year: interest above your Personal Savings Allowance, dividends above the £500 Dividend Allowance, and gains above the £3,000 Capital Gains Tax allowance are all liable to tax. That difference compounds significantly over decades.
Informational content, not financial, tax, or legal advice. Verify amounts, limits, and current conditions directly with official sources (HMRC, FCA, FSCS) before making a decision.
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