How to turn an empty ISA into a passive income of £12,500 a year

With time, patience, and sensible stock-picking, it’s possible to generate a high and rising passive income from FTSE 100 and FTSE 250 shares.

Even someone starting from scratch, with an empty Stocks and Shares ISA, could target a second income of £12,500 or more, without having to get out of bed to earn it.

Thanks to the superlative benefits of the tax-free ISA wrapper, they won’t have to pay a penny in income tax, dividend tax, or capital gains tax, either. But there’s no time to lose. The sooner you get started, the bigger your ISA could be, and the more income you can potentially generate.

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.

A straightforward way to build wealth

A simple and popular way to start investing is to buy a low-cost index fund that tracks the FTSE 100. The UK blue-chip index has climbed 50% in the last five years, with dividends on top. In that time, the index has yielded around 3.2% a year. The total return is therefore closer 70%, with dividends reinvested.

How much do you need in your ISA to generate my income target of £12,500 a year? That depends on the yield on your shares. With that 3.2% yield, you’d need £390,625.

That sounds daunting, but it’s doable by harnessing the compounding power of equities. The historic total return on the FTSE 100 with dividends reinvested is 8% a year. Let’s say an investor tucked away £200 a month, and increased that by 3% a year. After 30 years, they’d have £395,819.

Thirty years is a long time. But there are ways of speeding things up. And that’s by building your own portfolio of shares, targeting stocks with higher growth and dividend potential.

Stock-picking can accelerate returns

FTSE 100-listed international savings and investment business M&G (LSE: MNG) is one of my most successful stock picks. Its shares have climbed 70% in the last five years. M&G is also one of the UK’s most generous dividend stocks. Today, it has a trailing yield of 6.1%, double the FTSE 100 yield.

M&G’s job is to invest other people’s money, both institutions and individuals. It also manages insurance, savings, and retirement products. It’s benefited from the fact that stock markets have done well in recent years.

In 2025, it made a profit before tax of £838m. That’s solid but only a small increase on the previous year’s £837m. The board is aiming to increase profits by at least 5% or more through 2026 and 2027.

Is M&G’s yield secure?

M&G has bags of capital strength, with a Solvency II coverage ratio of 242%. That underpins the dividend. The board plans to increase shareholder payouts by 2% a year from here.

Every stock has risks. M&G operates in a highly competitive sector, especially the booming pension risk transfer business, where everybody wants a piece of the action. A wider stock market crash would hit the value of its assets under management and percentage-based fee income.

After a strong run, M&G shares may slow but I still think it’s worth considering for income-focused investors. And there are even more exciting opportunities on the FTSE 100 today.

Should you invest £5,000 in M&g Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if M&g Plc made the list?

Harvey Jones owns shares in M&G.