When you deposit your funds in a current account, the bank or building society which offers you the account will pay you interest on your account balance in return. The current account you open will have a specific interest rate determined by the bank or building society. This rate is usually a few percent, and so your money will earn this percentage interest each year. Essentially, if you have a current account with a two percent interest rate and deposit one thousand pounds, you will be entitled to twenty pounds interest at the end of the year.
Current accounts usually offer minimal interest on your money. As the primary purpose of a current account is to facilitate efficient and simple cash management, the bank or building society may offer nominal rates of interest at around 0.10% gross per annum. However, as the competition in the Australian banking market intensifies, interest rates have become a tool to differentiate the accounts on offer and as such, interest rates comparable to those of savings accounts are becoming more widely available (albeit with certain qualifying requirements and limits). This is especially true of online current accounts, which benefit from lower running costs than their branch-based counterparts and can afford to offer quite generous interest rates (see Online Current Accounts).
Interest on cleared funds is usually calculated after the end of each working day and paid monthly. An Annual Equivalent Rate (AER) is frequently given to demonstrate what the gross interest paid would likely be if it were paid and compounded annually. Gross and Net interest are usually regulated in line with fluctuations in the Reserve Bank of Australia`s base interest rate and so a current account holder can expect the interest rates on offer to fluctuate accordingly.
There is no limit on the amount of interest you can earn on a cleared balance. However, any interest earned on your account balance is subject to income tax. Usually income tax is applied at the basic rate of twenty-two percent, but customers who earn a very low or a very high income will pay more or less income tax accordingly. The account balance will often determine the level of interest earned; many banks and financial institutions have a staged interest level, reducing interest earned on the balance when it exceeds a certain amount.
