Some investors have a goal of building up a second income stream via a Stocks and Shares ISA in order to try and retire early. An ISA can be an effective home for this strategy, as any dividends received or stocks sold for a profit aren’t subject to tax. If someone wanted to try to replace their main job with just investment income, here’s what the numbers could look like.
Setting the parameters
According to data online, the current full-time average UK salary is £39,039. After tax, this works out to be £32,319. I’m going to use the pre-tax figure for the strategy.
An important constraint is the ISA limit of £20k per year. A person can only contribute this maximum amount, although the limit might get raised in the future.
The next factor to appreciate is the average portfolio yield. I’d look to split the money equally between growth stocks and dividend stocks. Even though over the long term the growth side should be able to provide a higher return (around 10% per year), the dividend shares provide steady and reliable income (yielding 6%-8% annually). These returns are just my long-term assumptions, based on my experience of what can be achieved. Actual returns will vary and can even be negative.
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.
Talking numbers
Let’s assume an investor could afford to invest £20k over the course of a year. This works out at £1.66k a month. The portfolio’s average yield could be 8.5%, a blend of 10% from growth stocks and 7% from dividend stocks. In year 13, the portfolio could pay out £37,861, with £42,975 in year 14. The total ISA size would need to be £459,282. The income would come partly from dividends and partly from selling profits from growth stocks.
The investment amount could be reduced to £1,000 a month. Yet this would mean it could take two decades to reach the goal.
The timeframes are only projections. Depending on how the ISA performs, it could take more or less time. For example, dividends aren’t guaranteed, so the income from this investment might not continue indefinitely.
Hunting for picks
One stock that could be considered for this strategy is Kier Group (LSE:KIE). The stock is up 49% over the past year and has easily delivered gains exceeding the 10% target over several years.
Back in the summer, the company finished its latest fiscal year with a record order book (around £11bn), and a very high percentage of future revenue already contracted. This is above 90% for 2026 and a large portion for 2027. This provides strong visibility into future sales and cash flows, making it appealing to a long-term investor.
I think it could keep doing well because it should benefit from higher government infrastructure spending. Kier operates mainly in sectors such as rail, water and public infrastructure, areas that often benefit from government investment. High visibility of revenue helps smooth out the cyclical nature of more commercial construction.
One risk is that the company’s profit margins are still relatively thin compared with some industrial peers. This means earnings can be negatively affected by even relatively modest cost pressures.
Overall, I think it’s a good stock to consider for investors looking to build out an ISA for passive income.
