Earning an extra £1,000 in passive income can be a huge helping hand, especially during the current cost-of-living crisis. And by earning extra money inside a Cash ISA or, even better, a Stocks and Shares ISA, HMRC can’t come knocking at the door for taxes.
But how much money does someone need to earn this tax-free passive income? With the right strategy, it’s not as much as most people 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.
Crunching the numbers
According to celebrity financial advisor Martin Lewis, the most generous Cash ISAs are offering up to 4.68% in interest right now. But digging a little deeper, this elevated interest rate only lasts for one year, with most dropping to an average of around 3% thereafter.
At this lower rate of return, a £1,000 monthly passive income, or £12,000 a year, will need a Cash ISA worth around £400,000 – a fairly massive chunk of change. And that’s assuming interest rates don’t continue to decline from their current levels.
What about a Stocks and Shares ISA? This is where things get far more interesting.
By being selective, an investor can craft a custom portfolio that yields a far more lucrative 6% dividend return. And by selecting the right businesses, this payout can even grow over time, rather than fall.
Apart from dropping the required portfolio size by half to £200,000, the added bonus of capital gains can boost the returns even higher. And simply drip feeding money each month, investors can build up a six-figure nest egg and have a five-figure passive income in potentially a few short years.
The question is, which dividend stocks should income-focused investors choose in 2026?
A high-yield opportunity?
One dividend-paying stock from my passive income portfolio is LondonMetric Property (LSE:LMP).
The business is simple. It’s a commercial landlord that owns, manages, and leases a diversified portfolio of properties across the logistics, healthcare, convenience, and entertainment sectors.
With most of its tenants large-scale companies, the average lease duration spans just over 16 years, generating exceptional long-term revenue visibility and predictable cash flows. And it’s an advantage that management’s used to continuously hike dividends for 10 consecutive years.
In other words, even a tasty-looking 6.5% yield today could get even bigger. Of course, unlike in a Cash ISA, no investment’s ever without risk.
If inflation proves stubborn, there’s no guarantee interest rates will continue to fall. And that presents a potential problem.
With a large chunk of its debt maturing in a few years’ time, persistently higher interest rates may force LondonMetric to refinance at a less attractive rate.
The group’s sturdy cash flows should be capable of absorbing this. But it nonetheless applies more pressure to profit margins and, in turn, dividends. And if a surprise spanner is thrown into the works, today’s high yield might not be so sustainable after all – a key risk that investors must think about carefully.
Regardless, with such a stellar track record, I feel this risk is well worth considering for the potential reward. And it’s not the only passive income opportunity I’ve got my eye on right now…
