The Stocks and Shares ISA is the world’s greatest investment product. So why not make the most of this brilliant opportunity? Investors don’t have to invest a fortune in an ISA to make life-changing returns (more on this later). And any withdrawals made from one are protected from income tax.
The ISA’s other tax benefits include protection from capital gains tax (CGT) when you sell shares, as well as dividend tax when you receive dividends. This is more important than ever — from the 2026/27 tax year, the rate of dividend tax is rising for millions of people. Those who invest outside the ISA wrapper face cash grabs from HMRC that can eat into long-term portfolio growth.
With these perks, investors can supercharge their chances of a large second income in retirement. But how much would they need for an annual passive income above £20,000?
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.
Just a tenner a month?
Times are tough in the UK as the cost-of-living crisis drags on. And things could get a lot more difficult if the Middle East crisis sparks again, pushing inflation higher and denting economic growth. It could lead to more of us having less to regularly invest.
But it’s no time to panic. If history has taught us anything, it’s that even those investing small amounts can build a large nest egg to retire on. Even a £10 daily cash injection can be enough.
A tenner a day works out at roughly £304 over the course of a month. Thanks to the power of the stock market, an investor putting this into a Stocks and Shares ISA could expect to make £340,821 after 25 years, assuming an average annual return of 9%. Dividends would also need to be reinvested.
Buying dividend stocks
Retirees have a variety of ways they can turn this into a regular income. They can buy an annuity policy, for instance, or draw down a percentage of their ISA.
But I think there’s a better way to make a passive income. What about using that ISA wealth to buy dividend shares? This leaves scope for further portfolio growth and a steady stream of cash for living expenses. If invested in dividend shares with 7% yields, that would generate an annual income of £23,857.
And here’s the thing: with no income tax due on withdrawals, every penny an ISA investor makes in dividends is theirs to keep.
A FTSE 100 share to consider?
Dividends are never guaranteed. But investors have a wide range of 7%-yielding stocks to choose from, helping them build a diversified portfolio to reduce the risk of income shortfalls.
Legal & General (LSE:LGEN) is one top share to consider. I actually hold it in my own portfolio for dividends. It’s raised annual payouts every year for 15 years, with the exception of pandemic-hit 2020. And even then it froze the dividend while hundreds of other global shares were cutting, postponing, or cancelling dividends.
This is the sort of dividend reliability I Iove. But can Legal & General shares keep it up, and especially as inflationary pressures rise again, hitting consumer spending? I’m confident they can — the firm’s balance sheet is rock solid, with a Solvency II capital ratio of 176%.
Looking longer term, I expect profits to rise strongly as the financial services market grows, driving dividends even higher.
