A Stocks and Shares ISA is still one of the most popular and effective ways for investors to build long-term, tax-efficient passive income. It keeps all dividends and capital gains out of reach of HMRC, and there’s no tax on withdrawals — unlike pensions.
I’ve always thought of it as a flexible, stress-free vehicle for growing wealth that can later deliver reliable income throughout retirement.
How much is needed?
For an investor targeting roughly £1,000 a month — that’s £12,000 a year — the 4% rule provides a useful benchmark. That means around £300,000 invested would be needed to safely generate that level of annual income without depleting the pot.
It sounds daunting at first, but it’s absolutely achievable with time and discipline.
Let’s consider an example where an investor puts £300 a month into a diversified portfolio with an average dividend yield of 7%. By reinvesting those dividends, it could grow to nearly £300,000 over 25 years (including average price growth of 2%-3%).
That’s the magic of compounding. Even smaller contributions can grow surprisingly large over time when dividends are reinvested and left to snowball.
And at that point, the dividends alone would pay out over £20k a year – assuming the yield held. So keeping the funds invested, while riskier, could deliver even more passive income.
A dividend giant
Among the leading UK income plays, Legal & General (LSE: LGEN) stands out as a stock to think about. The firm is one of the biggest names in life insurance, pensions and asset management, serving millions of customers worldwide.
In its most recent half-year update, it reported £609m in operating profit, supported by strong results from its investment management and retail retirement divisions.
At around 240p per share, the company’s yield for 2025 sits at an impressive 9.1%, among the highest on the FTSE 100. Analysts expect this payout to continue rising over the next two years, citing robust cash generation and a healthy capital surplus.
Legal & General’s long record of consistent payments over multiple market cycles makes it a cornerstone for income-focused investors.
Still, it’s not risk-free. The firm’s exposure to interest rate fluctuations and market downturns could pressure profits. Regulatory changes or weaker performance from its investment arm may also slow dividend growth.
But for investors weighing long-term dividend potential, it’s an example of a stock paying income that could compound tax-free inside an ISA.
Building a durable income stream
While a single stock can offer attractive income, I believe the best approach is diversification. Holding at least 15-20 companies across different industries spreads risk and ensures a mix of dividend stability and capital growth potential.
It’s also wise to stay invested through the market’s fluctuations — even using dips as opportunities to buy shares at lower prices.
Over time, a Stocks and Shares ISA offers one of the simplest ways to build financial independence. By making regular contributions, reinvesting dividends and allowing compound growth to do its work, even modest savers can work toward that £1,000 a month goal.
Sure, it won’t happen overnight — but steady progress and patience could make retirement income dreams a tangible reality.
