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In 2026, investors can quickly unlock a new tax-free income stream through a Stocks and Shares ISA.
This powerful wealth building tool allows people, even those with little money, to buy shares in the stock market without worrying about HMRC knocking on the door. And what’s more, if it’s allowed to continue, the dividend income at the beginning can be very important.
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.
Turning £7,000 into an income stream
I FTSE 100 it is home to the biggest businesses of all London Stock Exchange. And right now, investors can pick up shares in a cheap and cheerful index fund to start earning an immediate 2.9% dividend yield.
In other words, investing £7,000 in this way unlocks an annual income of £203 overnight.
That’s not bad. But it is by no means a downgrade. Fortunately, for stock pickers, the income opportunities are very exciting.
Take it Legal & General (LSE:LGEN) as a good example to consider. By investing directly in this FTSE 100 insurance giant, shareholders can earn a whopping 8.1% yield.
That’s enough to generate £567 in income from the same £7,000 investment. And if you consider that this business has increased shareholder payments every year since 2009 (except for the 2020 pandemic), this income can continue to grow over time.
Where is the danger?
Achieving a yield of nearly 8% is no doubt exciting, especially if it’s driven by a rising payout rather than a rapidly declining share price.
However, when a stock offers nearly three times the yield of its parent index, that sets off some alarm bells. Why? Because it usually indicates a great danger.
In the case of Law & General, there are some valid reasons for caution. Core operating earnings are currently insufficient to cover dividends, with the coverage ratio falling below 1.0, which is negative.
In other words, the company currently has to use its cash reserves to maintain shareholder payments. Although this is stable in the short term, if the business experiences a sudden disruption in cash flow or conditions do not improve, management may be forced to cut profits.
In recent years, the main focus of income has been the lucrative pension risk transfer (PRT) market which has revived after a rapid rise in interest rates. But now that prices are dropping again, it’s getting harder to maintain this profit, especially since the level of competition in this space has gone through the roof.
As a diversified insurance business, Legal & General is not solely dependent on the PRT market. And its Asset Management division is seeing some progress in increasing net profit margins – an area where the business has significant potential given its £1.1trn assets under management.
However, there is no guarantee that these anticipated management fee gains will materialize as expected. So, where does that leave ISA investors?
An important point
For investors looking to generate income through a Stocks & Shares ISA, Legal & General shares present a high risk, high reward opportunity. If the company successfully supports the profitability of its asset management division, earnings and further increases in dividends may follow. But if it fails in this effort, the opposite may happen – a risk that investors need to consider carefully.
