Here’s how an investor can use a Stocks and Dividends ISA to direct a four-figure secondary income

The latest figures (March 2023) from HMRC reveal that £725.9bn has been invested in a Stocks and Shares ISA. Although this sounds like a lot, it is only a quarter of the market value Nivdia. But it is definitely my preferred method of investing in the UK stock market. That’s because any capital gains generated using an ISA – and all income – are tax-free.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

The maximum that can be invested annually is £20,000. But what kind of return can this achieve?

A dream state

In accordance with AJ Bellwhen the final benefits of the year are confirmed, it seems that i FTSE 100 it will have produced 3.6%, by 2024. If this rate of return is achieved over 25 years, and £20,000 is deposited into an ISA each year, the investor will have £817,862 at their disposal after a quarter of a century.

In year 26, this will generate an income of £29,443. Alternatively, drawing down 5% of this pot each year would yield £40,893.

This assumes that all profits are reinvested, a process known as compounding. It has been described as the ‘eighth wonder of the world’, and mankind’s greatest invention. It always gets a good machine.

Something real

However, I don’t think most people are in a position to invest a full amount each year. However, a single £20,000 investment would still grow to £48,420 over the same period, with an annual return of 3.6%.

Both scenarios do not assume capital gains (or losses). And it is clear that the benefits cannot be guaranteed. However, it shows the potential benefits of taking a long-term view. Billionaire investor Warren Buffett has been around for 83 years, and is worth over $140bn!

Building blocks

History tells us that many industries go in and out of favor. But if I look ahead in 25 years, I think housing stocks will be there. After all, everyone needs a place to live.

Taylor Wimpey‘s (LSE:TW.) FTSE 100 builder with an excellent reputation for paying huge dividends. Although not yet confirmed, it looks set to return 9.6p to shareholders in respect of its 2024 financial year. If this proves correct, it means a previous yield of 8.5% (17 January).

However, for the company’s shares to continue there must be stability in the housing market. And its latest trading update, suggests this is possible. On 31 December, its order book was £1.995bn, an increase of £223m from the previous year. It also reported a lower cancellation rate and an increase in enquiries. In addition, it has a lot of land (79,000 plots) on which to build.

But the industry faces its own challenges. Recent market turmoil has cast doubt on whether the Bank of England will cut interest rates as quickly as previously predicted. And recent UK economic data has been disappointing, which could affect consumer confidence.

However, the company’s strong balance sheet (with very little debt) puts it in a good position to take advantage of the recovery.

I will not invest as I already have a peer position Persimmon and I don’t want two shares in my ISA from the same sector, especially with similar operating models. But I believe that investors should be considered.