Is the £20,000 ISA allowance irrelevant to younger investors?

Each year, we’re prompted to use up our full ISA allowance before it’s gone. But is the £20,000 limit irrelevant to younger investors? Let’s take a look.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Woman pulling baffled face

Image source: Getty Images

With the end of the tax year approaching, ISA season is well underway. You’ve probably come across lots of material encouraging you to make the most of your ISA allowance.

But, is it even realistic to maximise use of the allowance based on the current limit? Some people don’t think so.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

[top_pitch]

What is the current ISA allowance?

Right now, the ISA allowance is £20,000 per tax year across all ISA accounts you have. If you want to, you can use the full allowance on your stocks and shares ISA and pick up heaps of great investments.

You have just under two weeks to make the most of your ISA allowance ahead of the 5 April deadline.

However, Victor Trokoudes, chief executive and co-founder of investment app Plum, believes that this limit is irrelevant for the majority of younger investors.

Why is the ISA limit irrelevant for young investors?

According to data from HMRC, the average total amount held in ISAs is:

  • £6,450 for 18-24-year-olds
  • £7,750 for 25-35-year-olds

So, the bulk of investors under the age of 35 aren’t even using half of a single year’s £20,000 ISA allowance!

Data from Plum also shows that the average saver puts away £150 each month, with just under £100 of that going to investments. Troukoudes explains: “Every year we see reminders that the end of the tax year is approaching and to fill up our ISA allowances.

“But this isn’t a particularly useful message for young people that struggle to get anywhere close to that amount.

“In fact, the tax-free allowance is more or less irrelevant to millions of people on average incomes, who can’t afford to save £20,000 a year.”

[middle_pitch]

Does this mean younger investors should ignore their ISA?

Absolutely not! But, there could be a slight adjustment to some of the messaging sent out to young investors in the UK.

Instead of banging on about saving twenty grand, making plenty of savers feel inadequate, there should be more emphasis on the importance of small, regular contributions to a stocks and shares ISA account.

Even if you’re only able to contribute small sums to your account, compound interest means that your portfolio can grow immensely over time.

And, the main perks of the ISA wrapper allow this money to grow without the need to pay tax on the gains. Then, when you want to withdraw money, it’s also tax free.

Why is manageable saving and investing so important?

Troukoudes goes on to reveal some insights into this matter. Specifically, why small regular contributions to your ISA are so crucial for short-term security and building long-term wealth. He explains, “This is especially important in the current environment with rising living costs. Having a short-term rainy day fund is really essential to building financial security.

“Once this is done, then the long-term wealth growth can begin in earnest. Over a long time horizon, the potential benefits run into the hundreds of thousands of pounds.”

What should young investors do with ISAs and savings?

Don’t beat yourself up if you’re not able to save and invest £20,000 into your ISA each year.

What’s most important is that you set yourself up with a top stocks and shares ISA account and then invest what you can. It’s those modest, consistent contributions that can allow you to build wealth over your investing lifetime.

If you want to roll the dice, Plum is offering entry into a £20,000 cash giveaway to new and existing Plum Plus customers who open an account before the tax deadline.

Just remember that when investing, there are always risks. So, make sure you’re on top of the rest of your finances and only invest money you’re comfortable putting away for the long term.

Please note that tax treatment depends on the individual circumstances of each individual and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »