Stocks and Shares ISAs may well have been built with passive income in mind. They’re perfect for making extra savings from your day job and building wealth and income – completely tax-free!

This is no miniature thing these days. Capital gains tax has now increased to 24%. Dividend tax is also a maximum of 39%. Labor tax, like income tax, can reach 45%, without taking into account social security contributions. For those of us who don’t have access to high-priced tax lawyers in distant tax havens, the cost of ensuring your money works for you can be high.

Now so simple to apply that you can open and manage them with just a few taps of your smartphone, these ISA accounts are considered not only the best investment tool in the UK, but as good as you’ll find anywhere in the world. Even the average saver can invest in places previously unavailable. They can focus on building a lifetime of passive income without paying a penny to HMRC.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Good choice

As with many money-related topics, the burning question is: how much? How much passive income can I earn?

A target of £2,000 a month sounds pretty good, which means £24,000 of passive income in a year. To get this amount via an ISA, assuming a 4% withdrawal, I would need a total of £600,000. That’s quite a lot, right?

But the beauty of a stocks and shares ISA is that you don’t have to invest over half a million. Adding that amount all at once isn’t even possible given the annual deposit limits. A better comparison is a mortgage loan. Many Britons are keen to make the decision to climb the housing ladder, building equity in the long term. Well, ISAs work similarly.

The average house these days costs an arm and a leg. So building a £600k ISA. pounds that pays two thousand a month seems like a decent option to me.

Lots of growth

My own Stocks and Shares ISA is heading towards this figure, although still a long way off. Wrestling like Tesco (LSE: TSCO) are driving my ISA higher.

Tesco share price, likewise FTSE100 overall is at a record high and has doubled since 2023. Part of this is related to inflation. Part of the appeal is the country’s largest supermarket’s resistance to inflation.

Another part is the decent dividend yield of 3.11%. And because I bought the stock when the stock was cheaper, my effective profit (sometimes called “cost profit”) is much higher.

Long-term trends, such as a growing population, will support further growth. Personally, I think Tesco offers one of the best in-store shopping experiences and by far the best online experience of those I’ve tried.

The risks include paltry margins, which means tax increases could hurt disproportionately compared to other companies.

Overall though, I’m elated to have it in my ISA and I hope it will provide plenty of passive income one day in the future.