I’d invest £50 a month in a Stocks and Shares ISA for passive income

Investing for passive income in a Stocks and Shares ISA could have significant tax and investment benefits, argues this Fool.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

I am always looking for new ways to boost my passive income from investments. I believe investing in equities is one of the best ways to create a steady income.

Combined with the tax-efficient nature of a Stocks and Shares ISA, the strategy could be twice as effective. 

ISAs are a great tool to invest in the market because any income or capital gains earned on assets held within one of these wrappers are not liable for tax

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

This suggests I could generate a tax-free passive income by investing and saving in a Stocks and Shares ISA

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.

Stocks and Shares ISA investing

According to my calculations, I only need to invest £50 a month to generate a passive income from equities. A figure of £600 a year might not seem like much, but thanks to the power of compound interest, this could become a significant sum in the long run. 

According to my calculations, if I can achieve an average annual return of 10% on my money, I calculate I could have a nest egg worth £40,000 after 20 years of saving.

This is only a ballpark figure. I cannot assume I will generate a 10% return indefinitely.

Nevertheless, I believe it clearly illustrates the wealth-creating power of equities in the long run. If I were to increase my monthly deposit to £500, I think I could accrue a near £400,000 investment pot after two decades of saving. 

This is entirely compatible with a Stocks and Shares ISA as investors can deposit £20,000 a year into one of these investment accounts. This figure of £500 a month is only £6,000 a year.

Using the entire allowance of £20,000 a year with a 10% per annum return could produce a £1.3m investment pot within 20 years. 

Still, as I touched on above, success is not guaranteed with this approach. Equity markets can be pretty volatile. If they fell 50% in a single year, it could take me several years to recover from these losses. There is also no guarantee I will learn 10% per annum. The actual figure could be a lot more, or a lot less. There is no way of telling.

Passive income strategy 

Despite these challenges, I believe this strategy is one of the best ways to create a passive income. By investing £50 a month, I could build a nest egg worth £40,000 after 20 years. If I then switch from growth investing to income investing, I could earn a 7% per annum return on my money, based on current dividend yields.

Once again, this figure is only designed to illustrate the potential return available. There is no guarantee I will be able to invest in stocks yielding 7%.

But if I can, I could turn my investment lump sum of £40k into an annual passive income of nearly £3,000. This income would be tax-free if generated by assets in a Stocks and Shares ISA. 

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

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.

Rupert Hargreaves has no position in any of the shares mentioned. 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

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

This world-class FTSE 100 company’s expecting up to 10% growth in 2025

This is one of the most profitable companies in the FTSE 100 index. And right now, it’s firing on all…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10k invested in Phoenix shares 10 years ago would have generated passive income of…  

Shares in this FTSE 100 insurance giant have done poorly over the last decade. Harvey Jones wonders if super-sized passive…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

This brilliant FTSE income share just paid me £458 for doing absolutely nothing – I love it!

Harvey Jones is sending some love to high-yielding FTSE 100 dividend income share M&G today in return for it sending…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

Should I buy Palantir (PLTR) stock for my ISA in 2025?

Palantir stock's flying in 2025, having risen almost 60% already. Should Edward Sheldon take the plunge and buy the growth…

Read more »

Workers at Whiting refinery, US
Investing Articles

Drowning in debt amid falling oil prices, can the BP share price recover?

By far the worst-performing of the oil majors, Andrew Mackie assesses just what it will take to kick life back…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

As Cash ISA changes approach, is now the time to buy UK shares for long-term wealth?

Changes to the Individual Savings Account (ISA) could present an unexpected opportunity to try to get richer with UK shares.

Read more »

Emma Raducanu for Vodafone billboard animation at Piccadilly Circus, London
Investing Articles

What’s the point of investing in Vodafone, the FTSE 100’s 31st most valuable stock?

Our writer’s becoming increasingly frustrated with the share price performance of this FTSE 100 stock that was once the most…

Read more »

Lady taking a carton of Ben & Jerry's ice cream from a supermarket's freezer
Investing Articles

‘Britain’s Warren Buffett’ isn’t a fan of UK shares (except this one)

Terry Smith, founder and CEO of Fundsmith, has been described as a 'British Warren Buffett'. But he’s not that keen…

Read more »