£20,000 in an ISA? Here’s how I’d aim for a tax-free second income of £22,684 a year

Every month I invest in shares in my ISA to build out my portfolio. The goal is to generate a significant future second income so I don’t have to put more hours in at the metaphorical coalface for more money.

Here, I’ll explain how I’d go about investing £20k to target a tax-free £22k+ passive income stream.

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.

Learning the ropes

History has shown that the stock market rises over time. Therefore, the sooner I start investing, the better. This gives my portfolio more time for compounding and building wealth.

While this is true, I also think it might be wise not to rush in and buy the first group of stocks I take a fancy to. Instead, I’d take my time to grasp the basics of investing.

That would include learning about different sectors, and familiarising myself with individual companies, their latest financial reports, and how they actually make money. I’d also start learning how to value a stock.

Fortunately, there’s a wealth of information online nowadays, including resources and/or stock-picking services from The Motley Fool. YouTube and podcasts are also great for gleaning information.

For me, though, you can’t beat a good old book. Here are some I’d recommend on investing and investors.

• 100 Baggers: Stocks that Return 100-to-1 and How to Find Them by Christopher Mayer
• The Psychology of Money by Morgan Housel
• The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
• The Art of Quality Investing: How to Invest in the Best Companies in the World by Compounding Quality and Luc Kroeze

Building my portfolio

Next, I’d decide what to buy with £20k in my ISA. Neither growth nor dividends are guaranteed, so I’d want to buy around 8-10 shares for diversification purposes.

One of those stocks would be Polar Capital Technology Trust (LSE:PCT). This is a FTSE 250 investment trust that invests in growth shares, primarily listed in the US.

Investing in this would give my portfolio instant exposure to some of the world’s greatest tech firms, including Apple, Microsoft, and chipmaker Nvidia. These are incredibly profitable businesses with entrenched competitive advantages.

Many of these firms are also at the centre of the artificial intelligence (AI) revolution. According to various experts, AI could contribute trillions of dollars to the global economy by 2040. So I’d want my ISA to have exposure to that, just in case. Polar Capital Technology Trust is a straightforward way to achieve this.

The risk with this stock is that it’s focused solely on the tech sector. If that were to fall out of favour with investors, which does occasionally happen, I’d expect the trust’s performance to suffer.

I’ve already got loads of technology exposure in my portfolio. But if I were starting from scratch, this would be my choice.

Generating passive income

Through such stocks, I reckon it’s entirely realistic to aim for a 10% return over the long run.

Were I to achieve this, my portfolio would double after 7.2 years. After 30 years, it would grow to an incredible £348,988 (excluding any trading and platform fees).

At this point, I could draw down 5% per year for a tax-free income of £17,449.

Alternatively, I could pivot towards high-yield dividend stocks. If they collectively yielded 6.5%, that would result in annual passive income of £22,684.