I’m trying to understand how to calculate daily interest correctly.

Let’s assume I have £1000 in cash ISA. Interest rate is 5% AER. What I find online, it should be £1000 x 5% divided by 366 days.

When I compare that to the actual daily interest, these don’t match. What am I missing?

Welcome to the Community, @Bunman

You can find an approximate calculation of the daily payment using the interest **calculator** on our website. Alternatively, you can use the formula provided in our Help Centre. Daily interest payments are calculated using the industry standard AER formula. Here’s an example with the numbers from your post:

(1 + r/n) ^ n - 1, where

- r = AER
- n = compounding frequency - 365.25 days. We use 365.25 days in the calculation to account for leap years.

Formula used: **Daily payment (DP) = Cash balance * [(1 + AER) ^ 1/365.25 - 1]**

*Cash Balance = £1,000*

*AER = 5%*

DP = £1,000 * [(1 + 0.05) ^ 1/365.25 -1]

DP = £1,000 * (1.05 ^ 1/365.25 - 1)

365.25th root of 1.05 ~ 1.00013358911

DP = £1,000 * (1.00013358911 - 1)

DP = £1,000 * 0.00013358911

DP = £0.13358911 or £0.13 when rounded to the nearest penny.

Keep in mind that occasionally, you may receive an interest payment that is slightly less than the one you did the prior day. The reason behind this is that the interest is accumulative, and the rest of the interest will be included in your next payment instead