Want to earn an extra £36,000 second income entirely tax-free? It might sound too good to be true, but a growing number of ISA investors are turning this dream into a reality.
With the UK stock market delivering an average total return of 8% a year, drip feeding just £500 a month into an ISA could be all it takes to start eventually earning a five-figure passive income. And those who start early can go on to earn a lot more. Here’s how.
Aiming for £36,000
Looking at the FTSE 100 today, passive index investors can expect to earn a dividend yield of roughly 2.9%. And at this level of payout, earning £36,000 a year will require a pretty massive portfolio worth £1.24m.
However, for stock pickers, the required threshold is significantly lower. By building a custom ISA portfolio, even at today’s valuations, it isn’t too tricky to generate a 5% annual yield. And at this rate, the required portfolio size drops to £720,000 – that’s £520,000 less!
Of course, not many people have close to three-quarters-of-a-million pounds just lying around. But the good news is, even a modest investor can still build this required wealth over time.
By investing £500 each month in line with the stock market’s average 8% rate, this threshold can be hit within around 29 years. And after close to three decades of compounding, the challenge now becomes finding high-quality dividend stocks that pay a 5% yield.
Income opportunities in 2026
Looking across the FTSE 350, there are over 60 stocks with a yield of 5% or more in January. And among these stands Aviva (LSE:AV.), which continues to offer a fairly chunky 5.5% payout, even after climbing close to 40% in the last 12 months.
The insurance giant’s been on a bit of a rampage in recent years. With rising interest rates sparking fresh life into the pension risk transfer market, driving up demand for the firm’s annuities. And with management leveraging its financial strength to execute the takeover of Direct Line, the company’s seemingly on track for another strong year.
Aviva’s currently aiming to deliver an 11% average earnings per share growth rate by 2028 while simultaneously boosting its return on equity all the way to 20% through improved profit and free cash flow generation.
That’s definitely good news for income investors since profit and cash flow are ultimately what fund dividends. However, even the most promising investments have their weak spots. In the case of Aviva, there’s significant execution risk when it comes to integrating Direct Line.
Large-scale acquisitions and mergers come with all sorts of unexpected complexities. And if the anticipated synergies and savings fail to materialise or surprise costs start to spiral, the company could fall short of its medium-term targets.
Even if integration goes without a hitch, claims inflation driven by US tariffs, particularly for motor insurance, could nonetheless offset savings, compressing margins in the process.
Nevertheless, with an impressive track record and a business model that’s becoming increasingly capital light, I think Aviva shares may be worth investigating further. And it’s not the only second income-generating opportunity I’ve got my eye on right now.
