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Stocks and Shares ISAs might well have been built for passive income. They are perfectly suited for taking extra savings from a day job and building wealth and income – entirely tax free!
That’s not a minor point these days. Capital gains tax goes up to 24% now. Dividend taxes are a maximum of 39% too. Tax on work, like income taxes, can reach 45% and that’s without factoring in National Insurance contributions. For those of us without access to expensive tax lawyers of far-flung tax havens, the cost of getting your money to work for you can be expensive.
These ISAs, now so easy to use they can be opened and managed with a few touches of a smartphone, are considered to be not just the UK’s best investing vehicle, but about as good as you’ll find the world over. Even an average saver can invest in places previously inaccessible. They can target building a lifelong passive income without giving a single penny to HMRC.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither 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.
Good choice
As with many topics when it comes to money, the burning question is: how much? How much passive income can I make?
A target of £2,000 monthly sounds pretty nice, which is £24,000 in passive income over the year. To receive that amount through an ISA, assuming a 4% drawdown, I’d need £600,000 in total. That’s quite a lot, isn’t it?
But the beauty of Stocks and Shares ISAs is that you don’t have to bung in over half a million. Adding that much all at once isn’t even possible given the yearly deposit limits. A better comparison is that of a mortgage. Many Brits are happy to fork out to get on the housing ladder, building up equity over the long run. Well, ISAs work similarly.
The average house costs an arm and a leg these days. So building up to a £600k ISA that pays out two grand a month sounds like a decent option to me.
Much growth
My own Stocks and Shares ISA is heading towards that figure, albeit some way off yet. Stocks like Tesco (LSE: TSCO) have been propelling my ISA upwards.
The Tesco share price, like the FTSE 100 as a whole, is at record highs, having doubled since 2023. Part of this is inflation-linked. The nation’s largest supermarket’s inflation-resistant properties are part of the appeal.
Another part is a decent dividend yield of 3.11%. And because I bought in when the shares were cheaper, my effective yield (sometimes called ‘yield on cost’) is significantly higher.
Long-term trends like an increasing population will support further growth. And personally speaking, I think Tesco offers one of the best in-store shopping experiences, and easily the best online experience of ones I’ve tried.
Risks include wafer-thin margins, which mean tax rises can disproportionately hurt compared to other companies.
Overall though, I’m happy to have it in my ISA and hope it will provide plenty of passive income one day in the future.
This story originally appeared on Motley Fool
