How much do you really need in an ISA to earn a £20,000 passive income
Dividend shares are an excellent way to earn passive income. Thatâs especially the case when held in a Stocks and Shares ISA, as dividend taxes donât apply.
The FTSE 100 is home to many world-class, established income shares. For instance, Aviva (LSE:AV.) currently offers a chunky 6.5% dividend yield.
If an ISA consisted solely of Aviva shares, how big would it need to be to earn £20k a year in dividends? Letâs crunch some numbers.
My trusty calculator tells me it would to be worth a whopping £308k to achieve that target in 2026/27.
Itâs a sizeable sum to many. That said, there is a far cheaper way to reach this passive income goal.
The magic of dividend shares comes from income that grows, reinvestment of dividends, and allowing time to do much of the hard work.
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.
Path to a five-figure passive income
Consider this example. An investor buys £5,000 of Aviva shares at the start of every year. It has a long history of increasing dividends and has a stated mid-single-digit policy.
Conservatively, we can assume payments rise by 5% a year. Letâs assume a starting yield of 6.5%, and all dividends will be reinvested inside an ISA. To be extra-conservative, letâs also assume its share price doesnât grow over time.
If an investor does this consistently for 15 years, they would have added £75,000 to the ISA. But the portfolio would be worth £176,946. In addition, it would be throwing off £20,176 in dividends. Thatâs over £1,680 a month in passive income.
| Year | Total cash invested | Dividend income that year | Portfolio value at year-end |
| 1 | £5,000 | £325 | £5,325 |
| 5 | £25,000 | £2,279 | £31,127 |
| 10 | £50,000 | £7,446 | £81,289 |
| 15 | £75,000 | £20,176 | £176,946 |
A solid underlying business
Note that thereâs more to dividend shares than just dividends. Dividends are typically paid from earnings, so a solid underlying business is important.
Avivaâs operating profits surged 25% to £2.2b in 2025. The 2026 targets were hit a year early, and management launched a £350m share buyback programme.
Things are looking good for this London-based insurer. Itâs a capital-light business and benefits from a rock-solid balance sheet.
And the bigger picture is that it benefits from an ageing population, wealth growth, and AI-driven efficiencies across its businesses.
For patient investors, I think it could look compelling.
Diversification is wise
But bear in mind that even reliable dividend shares can face shocks. A prolonged weak economic cycle could slow earnings. A sharp change in interest rates could impact many of Avivaâs business areas. And regulatory changes to pensions and insurance products can requirement adjustments.
Dividends arenât guaranteed, and itâs also why an investor might consider diversifying across several income shares. The FTSE 100 is home to several excellent options and spreading investment across a few from different industries avoids putting all eggs in one basket.
As I like to say, thereâs plenty of fish in the Footsie.
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More reading
- Aviva shares now yield 6.6%. Time to consider buying?
- Want to try and turn £5,000 of savings into a £1,068+ monthly passive income? Hereâs how
- A superb 7.7% forecast yield! Time for me to buy more of this FTSE passive income superstar?
- £210 drip-fed into this 6.8%-yielding UK stock could lead to a £1,000 second incomeÂ
- 3 steps to turn a £20k ISA into a potential £2,240+ yearly second income
The Motley Fool UK has no position in any of the shares mentioned. Harshil Patel has no position in any of the shares mentioned. 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.
