How much passive income can you earn with £20,000?
A Stocks and Shares ISA is a valuable asset for investors looking to earn passive income. In fact, itâs become even more so after the Autumn Budget.
The contribution limit stays at £20,000, but dividend taxes are going higher for investors in the basic and additional rate brackets. And the difference might be more than you might think.
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.
A £20,000 investment
From April, basic-rate taxpayers are set to pay 10.75% on dividends above £500. So someone who invests £20,000 in a portfolio yielding 5.5% wil pay £64.50 on £1,100 in annual dividends.
That doesnât sound like much, but it adds up to £1,935 over the life of a 30-year investment. And the situation is worse for someone who wants to grow their income by reinvesting.
The £500 dividend allowance stays fixed as a portfolio grows, so investors donât just pay more tax. They actually end up losing a higher percentage of their passive income.
As a result, a basic-rate taxpayer who starts with £20,000 and reinvests at 5.5% for 30 years ultimately ends up paying £5,493. But this isnât the only cost.
Investors who use Stocks and Shares ISAs donât just save that tax. They also get to reinvest it, to give their dividends an additional boost with the cash they save in taxes.
The difference over 30 years is huge. Instead of £3,776 a year from a taxable account, an investor who uses a Stocks and Shares ISA can earn up to £4,668 in annual passive income.
A 5.5% yield
Iâve been focusing on a 5.5% return in the calculations above. And thatâs because thereâs a dividend stock with that yield that I think is worth considering right now.
The stock is Admiral (LSE:ADM). It has a lower dividend yield than some other UK insurers, such as Aviva or Legal & General, but I think the corresponding risks are also much lower.
Car insurance is a good industry and a bad industry. Itâs good because itâs non-negotiable â anyone who wants to drive has to buy insurance from somewhere.
Itâs bad because itâs mostly a commodity. Customers just go wherever the cheapest price for the cover they need is on offer and there isnât much companies can do about this.
Admiral, though, has a unique advantage. Its telematics products give it better data about drivers, allowing it to assess risk more accurately and maintain higher margins.
In any given year, premiums can fall if competitors price contracts too low. But this isnât sustainable and Admiralâs better data gives it a key long-term advantage.
Dividend investing
Admiral is the kind of stock I think income investors should consider in the portfolios. But there are other companies that also have strong positions in important industries.
The ultimate ambition has to be to build a diversified portfolio. And I think UK investors can do this while maintaining a 5.5% overall dividend yield.
An important part of the process, though, is taking advantage of opportunities like Stocks and Shares ISAs. Thereâs no point earning a big return if you have to give it away in tax.
The post How much passive income can you earn with £20,000? appeared first on The Motley Fool UK.
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More reading
- Passive income for life? These FTSE 100 stocks look attractive to me
- After an 86% dividend boost, I think Admiral Group’s one of the best income shares to consider buying now
- How a Stocks and Shares ISA could supercharge your passive income
- If a 40-year-old invested £500 a month in an ISA, see what they could have at retirement
- With £20,000 in savings, how much passive income can you realistically expect from a Stocks and Shares ISA?
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group Plc. 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.
