MAKING PASSIVE INCOME

 

While a passive income stream can be pretty easy once it’s set up, it does require a lot of planning and preparation beforehand.

You could well have more than one source of passive income, but you’ll need to have a think about which methods will suit you and bring in enough money to be worth the initial effort.

Here are some things you’ll need to consider first:

Be prepared to put in effort and capital upfront: Whether you’re planning to invest in a provperty r set up a side hustle, passive income requires input at the start.

Be willing to accept risk: Given the effort and capital required, there’s no guarantee the income you’ll receive (if any) will be enough to outweigh what you put inp

Have other sources of income: Making sure you’re not dependent on passive income will help mitigate the risk while you’re setting it up – so, continue with your job, or make sure the set-up costs don’t take up too much of your pension, for example.

Consider your personal circumstances: Remember, the right passive income approach for you will depend on your timescales, personal circumstances and risk appetite.

Here, we detail some of the ways to make passive income that could be considered by almost anyone.

1. Investing in stocks and funds

Investing can be an accessible way to earn a passive income and can be especially valuable if you make use of tax-efficient individual savings accounts (Isas). With an Isa, you can invest up to £20,000 annually and returns are free from both capital gains and dividend taxes.

This tax efficiency has grown even more important given the announcement in the recent Budget of a reduction in the capital gains tax allowance.

You just need to bear in mind that investments also carry their own risks and are subject to fluctuations. This underlines the importance of having a diversified portfolio.

2. Prioritise dividend-paying stocks

More specifically, look into putting a lump sum into stocks or funds that pay a dividend. This is a distribution of earnings to shareholders from the company they’re invested in, which tend to be paid quarterly – and you can usually choose to receive it in cash. If you choose to do this, you won’t benefit from the compound interest of other investing income, but it is an easy way to arrange a regular source of income.

Unless the investments are held in an Isa, you’ll pay tax on dividend income above £500 in 2024-25.

3. Rental income

Investing in property was once a popular way to generate passive income through buy-to-let arrangements. 

If you don’t have a second home, but do have spare room, taking in a lodger is another option. Under current rules, you can earn up to £7,500 a year letting a furnished room without having to pay tax on it. This is thanks to the “rent-a-room” scheme.

If you earn more than this, you are required to complete a tax return.

4. REITs

If you’re not keen on investing in a physical property, a real estate investment trust, or REIT, might be a better way to capitalise on the sector.

REITs are closed-ended funds, which have a fixed pool of capital that is not affected by investors buying and selling. This protects them from the issue of “liquidity mismatch”, when managers are unable to fulfil redemptions if investors rush to cash out – as was seen during the Covid pandemic.

5. Savings interest

Simple as it sounds, earning interest on savings is a form of passive income.

The key here is to look around for the highest rates you can find, as this will mean you’re making the most of your hard-earned cash.

To keep a stream of money coming in, you could set up a “bond ladder”. This involves splitting up your savings into several groups and depositing each one into a bond that is due to mature at a slightly different time – you could split them out to give yourself a payout once a year, or more often if you’re willing to keep track of lots of accounts.

When each bond matures, you can “pay yourself” the savings interest, and then re-invest the money into a different account, and so on