The short answer is that (as ben suggests) over a year you will make £50 (5%) on your £1000 savings. However, to understand how all the figures add up, here’s a quick explanation of some of the jargon:
Gross is the (yearly) interest that will be earned before tax.
Net is the (yearly) interest that will be earned after the government have taken their slice. In your example, there is no tax to be paid, because it’s a tax free ISA. Yay!
However, interest isn’t typically paid yearly. It is paid on a month by month basis. This means that, because of the joys of compound interest, the interest you receive month by month will actually increase, as the sum of money in your account does.
So to calculate how much money you’d earn over a year, you’d have to calculate each month’s interest separately, to account for the fact that your savings are growing all the time.
This is a ridiculous pain in the arse for most of us, so to account for this, banks will usually also advertise their accounts’ AERs (Annual Equivalent Rate). This compensates accordingly for compound interest using maths, and is essentially how much interest you’d earn in a year, if you left a sum of money in the account the whole time, neither withdrawing or depositing funds.
Some arithmetic below for your specific example:
Monthly interest: 4.89% divided by 12 = 0.4075%
Interest earned each month… and resulting account balance:
1. Interest: 0.4075% of £1000 – £4.08. ... Balance: £1004.08
2. Interest: 0.4075% of £1004.08 – £4.09. ... Balance: £1008.17
3. Interest: 0.4075% of £1008.17 – £4.11. ... Balance: £1012.28
4. Interest: 0.4075% of £1012.28 – £4.13. ... Balance: £1016.41
5. Interest: 0.4075% of £1016.41 – £4.14. ... Balance: £1020.55
6. Interest: 0.4075% of £1020.55 – £4.16. ... Balance: £1024.71
7. Interest: 0.4075% of £1024.71 – £4.18. ... Balance: £1028.89
8. Interest: 0.4075% of £1028.89 – £4.19. ... Balance: £1033.08
9. Interest: 0.4075% of £1033.08 – £4.21. ... Balance: £1037.29
10. Interest: 0.4075% of £1037.29 – £4.23. ... Balance: £1041.52
11. Interest: 0.4075% of £1041.52 – £4.24. ... Balance: £1045.76
12. Interest: 0.4075% of £1045.76 – £4.26. ... Balance: £1050.02
As you can see, I’m out by two pence, which is either because I’ve messed up some of the calculations, or because banks are evil and always round down.
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