A Stocks & Shares ISA could earn me an extra £2,274 in passive income!

With a change in the dividend tax threshold next month, Stephen Wright thinks investing using a Stocks and Shares ISA has never been more important.

| More on:
Calendar showing the date of 5th April on desk in a house

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A Stocks and Shares ISA allows people like me to invest in equities without having to worry about taxes on dividends or capital gains. That’s a big advantage for passive income investors.

Next year, the threshold for dividend tax is set to fall from £1,000 to £500. And I think this could have significant implications for investors over time.

Dividend tax

UK investors can earn up to £1,000 a year in dividends without paying tax on them, but that’s coming down to £500 from April. Above that, the tax rate is 8.75% for basic rate taxpayers like me.

With investments held in a Stocks and Shares ISA, there’s no limit to the amount of dividend income someone can earn without paying tax. For long-term investors this could be important.

Right now, a number of stocks have eye-catching dividends. Suppose, then, that I invest £20,000 in shares with an average dividend yield of 5% and earn £1,000 a year as a result.

If I hold my investments in a Stocks and Shares ISA, I’d pay nothing in dividend tax. But from April if I held them outside that, I’d pay £43.75.


That doesn’t sound like a lot, but it adds up over time. Over 25 years of investing, £43.75 a year adds up to £1,093.75 in missed income – but the situation is actually worse than this. 

Not only would I miss out on the income I paid away as tax, I’d also miss out on the opportunity to invest it to compound my returns. And investing £43.75 a year for 25 years results in £2,274.

That’s £2,274 I could have had just by using a Stocks and Shares ISA. I wouldn’t have had to do anything else differently, just buy the same stocks and hold them in a tax-advantaged account.

To me, that makes the case for using a Stocks and Shares ISA to invest extremely strong. And a 5% dividend yield looks highly achievable to me with the state of the stock market at the moment.

A 5% dividend yield

One stock with a dividend yield over 5% that I like the look of is Forterra (LSE:FORT). The brick manufacturer isn’t big – it has a market-cap of £367m – but it is well-established. 

Forterra’s products include the London Brick, which features in around 25% of the UK’s housing stock. And its operating margins (usually in the mid-teens) seem healthy. 

Investors should be wary of taking the 7% dividend yield as a given with the UK’s low construction output. Since January however, there have been encouraging signs in the property market.

I think Forterra has the balance sheet and the operational discipline to weather a downturn and emerge on the other side. And when it does, I’m expecting it to be a strong source of passive income.

Long-term investing

The difference between investing in a Stocks and Shares ISA and not might seem minimal. But factoring in the opportunity cost of missed compounding means it can add up over time. 

That’s why getting as close as I can to my £20,000 contribution limit is top of my list of ambitions every year. And it’ll be even more important when April comes around.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Forterra Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »