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The Stocks and Shares ISA deadline is looming. This means any unused allowance for the 2024/25 tax year must be deposited before midnight on 5 April, or it will be lost forever.
Of course, then the new £20,000 annual allowance kicks in. How much tax-free passive income could a stock investor generate from that amount? That’s the topic I want to explore here.
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.
Index average
The answer depends on what investments an individual buys. Each one will have its own dividend yield, contributing to the portfolio’s overall yield.
If an investor sticks their 20 grand into the Vanguard FTSE 100 UCITS ETF (LSE: VUKE), the yield would be 3.46% (as of 28 February).
The FTSE 100 has dipped a bit in March, so let’s call that 3.5%. What this means is that £20k invested in this FTSE 100 index fund would be expected to earn about £700 back in dividends.
Is that any good? Not if we’re just talking about income — fixed-rate Cash ISAs are still offering interest rates of 4.4%. This means £20,000 in a Cash ISA could safely yield £880 annually, surpassing the dividend income from the FTSE 100 index fund.
However, the FTSE 100 also has the potential for capital appreciation, whereas a Cash ISA offers safety but no growth potential.
For example, the Vanguard FTSE 100 ETF is up 12% in the past year. So if an investor had invested £20,000 12 months ago, they’d now have roughly £23,100. That’s a solid return.
Global trade headaches
However, there’s no guarantee the blue-chip Footsie will do as well this year. It’s a truly global index, meaning many companies within it face the prospect of navigating a trade war. This could negatively impact earnings and send the FTSE 100 lower from its current level.
Take Diageo, which owns spirits brands like Johnnie Walker, Gordon’s, and Tanqueray. It would feel the impact of US tariffs on tequila imported from Mexico and whisky from Canada. Its brands in these categories — Don Julio, Casamigos, and Crown Royal — are among its most popular with American consumers. So this situation is far from ideal for the drinks giant.
Longer term though, I’m optimistic the FTSE 100 can keep steadily chugging higher. Large constituents like AstraZeneca, HSBC, Rolls-Royce, and data analytics firm RELX have very strong competitive positions and attractive long-term growth opportunities.
But this year’s trajectory is very unpredictable, meaning there is more to consider than just passive income when buying the index.
Aiming for a higher yield
Alternatively, an investor could decide to deploy their £20k into a portfolio of individual UK stocks that yield much higher than the average.
Admittedly, this adds risk because companies have individual challenges and they’re not assured to pay out dividends. But income investors are blessed because there are so many options across the UK market.
Investment firm M&G, for example, is sporting a mighty 9.6% yield for 2025, while insurer Legal & General is offering a 9% payout. If an investor puts £10k into each stock, they could expect £1,860 in passive income.
Of course, owning just two dividend stocks is not advisable. But given the smorgasbord of options available, I think it’s possible to build a diversified £20k Stocks and Shares ISA that yields 6.5%. That would generate £1,300 a year in passive income.
