Can someone explain interest for me...

[TREMAiNE]

Ok so I do understand how interest works but I have a very specific interest query.

I have a bunch of money that goes into different accounts when I get paid.
£X goes into a basic account I have just to keep my holiday money that can get accessed whenever I wish.
£X goes into a savings account.
Whatever is left covers my bills and leaves me some "fun" money.

I don't ever tend to look at the savings account, it's actually with a different bank and I just see it as off limits and I don't have online banking set up for the account.

The holiday pot tends to have £10k in it at any one time - I don't really pay attention to it except when it's time to actually go on holiday.

However, recently (early July, I think), I put an additional £40k into the holiday pot - it's to fund a car purchase but I just wanted to put it in a separate account until I'm ready to pay for the car, so the holiday account actually has £50k in it.
It's been there for 2x months (when originally I only planned to have it un-spent for a couple of weeks) and yesterday some interest was paid into this account. The actual account states 1.5% interest, so that should be around £750, however, the interest was only £250 - which is 0.5%.

Why was the interest-only £250? How does it actually work and what does the 1.5% figure actually mean?

[BlindedByTheLights]

Tax?

[M4cruiser]

Presumably the 1.5% is an annual figure?

[Cabsi]

The UK bank (or whatever institution) does not tax the interest. It's up to the individual to declare it.

Are you sure the 1.5% is the latest rate?

If it is, then I presume the interest is not paid annually, but 0.5% is paid every 4 months (which is a strange schedule?).

[smokey mow]

£10k at 1.5% for a year will earn £150 in interest.

£40K at 1.5% for a year will earn £600, but as it was only in the account for 2-months of that year it would only have made 2/12th of that amount which is £100.

Therefore £150 + £100 = £250

[M4cruiser]

If the interest is paid annually (in September) then you've had £10K for a year (£150) and another £40K for 3 months (£600 divided by 6 = £100), total £250.

[Mr Squarekins]

Wait a year and your figure will be more than £750 as the interest will compound. However it's an annual rate, not every two months?

[TREMAiNE]

Ok thanks for the response.
So from the sounds of it, September just so happens to be the month where the annual interest was paid then - because those numbers a lot of you have said do make sense with what I got...

I expect the money to be in that account for another couple of months, so presumably I'll get the interest for those months in September 25?

[M4cruiser]

TREMAiNE said:

Ok thanks for the response.

I expect the money to be in that account for another couple of months, so presumably I'll get the interest for those months in September 25?

Depends what Ms Reeves does in the Budget

[scot_aln]

Worth shopping around for a replacement for that savings account. You could be earning easily double or even triple the interest. All helps!

[Mr Squarekins]

Yes, you should be getting 4% on instant access.

[Whistle]

If you can tie it up for 6 months you can get 5% AER or 4.98% gross from Atom.

[Huzzah]

NS&I are 4% for an instant access account.