How much do you need in an ISA to target £12.21 an hour in passive income?

Earning passive income is important. As Warren Buffett says, people who don’t figure out how to make money while they sleep ultimately work until they die.

The UK Living Wage is currently £12.21 an hour. But how much does someone need to have invested in order to aim to make that without having to work?

The maths

Someone who works for 40 hours a week earning £12.21 an hour makes £25,397 (before tax) in a 52-week year. And there’s a general rule to work out what it takes to earn that from investments.

Investors often use the 4% rule as a guide to figuring out what return they can get from a portfolio each year for around 30 years. Very roughly, the amount 4% of the total value of the investment.

That’s a pretty rough approximation in a number of cases. But on that basis, earning £25,397 a year (or £12.21 a hour) in passive income requires a portfolio worth £634,925.

For most people, it takes time to build this kind of investment and that’s absolutely fine. But before figuring out how to get there, there’s something important to note about ISAs.

Taxes

Someone who manages to generate £12.21 an hour from a Stocks and Shares ISA is in a better position than someone who does it by working. There are two reasons for this.

The first is that someone who makes money from investments also has time available to add to their income by working. That’s the most obvious reason. The other though, is tax. Unlike earned income, dividends received from a Stocks and Shares ISA aren’t subject to dividend tax – at least, not at the moment.

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.

That may change, but for the time being, there’s a strong incentive to try and earn passive income through an ISA. Being able to keep more of it is a big potential benefit.

Where to start?

For someone starting from scratch, the first question is which stocks to buy. And I think FTSE 100 consumer products business Unilever (LSE:ULVR) is a good place to consider starting.

The firm makes things that people need and are likely to need for decades to come. Importantly, its scale and well-known brands give it an advantage over competitors in the industry.

That being said, there are no guarantees. Consumers are free to switch between different products as often as they like and this presents a constant challenge for businesses like Unilever.

The firm however, is currently selling off some of its units to focus on its most promising lines. And I think this has the potential to generate good returns for shareholders over the long term.

The road to £634,925

Could buying Unilever shares set someone on the way to £634,925 – and £12.21 an hour in passive income? I think the stock’s a worthy candidate.

It comes with a 3.4% dividend yield and earnings per share have grown by 4.25% a year over the last 10 years. Adding that together gets an annual return of over 7.5%.

That’s more than enough to turn a £500 monthly investment into £634,925 over 30 years. Of course, the issue here is that the UK Living Wage should be much higher in 2055. So investors shouldn’t just focus on Unilever and may need to look at more ambitious growth stocks too. But I think it’s a good place to consider starting.

The post How much do you need in an ISA to target £12.21 an hour in passive income? appeared first on The Motley Fool UK.

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Stephen Wright has positions in Unilever. The Motley Fool UK has recommended Unilever. 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.