What does a net rate mean?
Net rate is the rate of interest that you receive on a savings account after tax (specifically after the basic rate tax of 20%, or the VAT) has already been deducted.
You may notice a net rate of interest shown by some banks and building societies on websites or literature. However, as interest is now paid without the deduction of tax, net rates may not be so well broadcasted (however, they are still important if you earn more interest than what your Personal Savings Allowance allows).
As with the gross rate, the net rate shows you what you would receive at the beginning of taking out the savings account. Compound interest (where you receive interest on your original investment and any accumulated interest thereafter) is not taken into account, and nor does it give an annual rate like an AER does, if the savings account that you are looking at has an introductory bonus of less than a year.
A net rate usually only reveals the rate of interest that you would receive at the outset if you are a basic rate taxpayer, so if you pay a higher rate or an additional rate tax, it can be a misleading comparison. Remember that if you are a basic rate taxpayer, the personal savings allowance means that you can earn £1,000 in savings interest per tax year before tax is deducted (if you are a higher rate taxpayer the amount is £500, and if you are an additional rate taxpayer, you do not get a savings allowance at all).
In order to determine what your personal net rate of interest is, you would need to deduct your tax rate (higher rate at 40%, additional rate%, 45%, the basic rate at 20%) from the gross rate.
For example, if the gross rate that is offered by a savings account is 3.00% and you are a taxpayer with a higher rate, you would do the following calculation:
3 – 40% = 1.80%
Making use of your own “net rate” is also an excellent way to compare the gross rate on a cash ISA against a non-ISA savings account.