How I’m boosting my tax-free passive income in a Stocks & Shares ISA

Happy New Tax Year! Here’s how I plan on using my Stocks & Shares ISA allowance in 22/23 for tax-free passive income and growth.

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It might not have the same party atmosphere as New Year’s – but the start of a new tax year is exciting in its own way. After all, you don’t get too many opportunities to make tax-free money. And that’s exactly what I’m looking to do by investing in a new Stocks & Shares ISA.

Why a Stocks & Shares ISA, though – wouldn’t a Cash ISA be safer for me? The problem is that even the highest paying Cash ISA (Gatehouse Bank five-year fixed term) only offers 2.1% currently. With today’s inflation rates, that’s effectively locking in a guaranteed negative return.

That doesn’t sound too good to me, especially as the daily cost-of-living crisis rumbles on.

Fortunately, as a Foolish investor, I’m looking to invest my cash for the long term. This means I’m ok with accepting a higher level of risk – with the hopes of a higher return.

What I want is a balanced portfolio, one that diversifies my risk across both income and growth-focused investments.

So, what do I invest in?

Beating inflation with tax-free passive income

If I were to pick one share for passive income right now, I’d go for City of London Investment Group (LSE: CLIG).

It has steadily increased its dividend yield by ~3.2% each year since the first payment in 2012. With its current level of ~6.8%, that’s much better than both cash and the FTSE 100 average dividend of ~3.5%.

Plus, by using my Stocks & Share ISA wrapper, I avoid ending up with an effective return of ~5.4% as a basic rate taxpayer. The more passive income I can keep, the better.

The risk I have with this share is its dividend cover level at ~1.2. That’s a little low for comfort. It is at least better than it was in ’20, so heading in the right direction now.

Adding growth with renewable energy

Tax-free income is great – but I also want to ensure I’m inflation-proofing my underlying capital by investing in sectors I expect to grow in the future.

And it’s difficult to ignore the renewable energy sector as an ever-increasing global market.

Renewable energy is a core interest of mine, having worked closely in the industry. It’s an area I want to be invested in.

But I think it’s still unclear who will be the biggest winners and losers as different technologies continue to compete.

For that reason, for now, I’m continuing to hedge my bets with IShares Global Clean Energy ETF (LSE: INRG)

I started investing in this exchange-traded fund back in 2017 but, despite the rapid increase since then, I’m continuing to hold for the future.

Support for renewable energy support is only growing as governments look to tackle their energy supply challenges, like with the UK Government’s Energy plan released last week.

This exchange-traded fund comes with a cost of 0.65% but I think that’s worth it for the diversification it offers across different renewable technologies.

My main concern is its limited 77 holdings and a sizeable US bias. I’ll want to balance that out soon.

After all, finding the right balance is what good Foolish investing is all about.

And for me, that means growth and income – all tax-free – in a Stocks & Shares ISA.

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.

Michelle Freeman holds shares in City of London Investment Trust and iShares Global Clean Energy ETF. The Motley Fool UK has recommended City of London Investment Group. 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.

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