4 passive income ideas to boost your budget

What is passive income?

Passive income is money that comes into your account regularly without you having to do daily work to earn it.

It usually takes some outlay at the start, whether in terms of money, time or using your skills, but after that, it can be relatively self-sustaining.

The best passive income ideas give you extra financial security without requiring day-to-day input. There are many options, depending on your skills, risk appetite and current assets.

What are the best ways to make passive income?

The best passive income streams for you will depend on your specific talents.

By harnessing the skills and knowledge you already have, you could generate passive income with ease.

For instance, if you’re creative or good at teaching, you could generate passive income from writing an online course. If you have financial knowledge and some money to invest, you could consider passive income investments such as dividend-paying funds within a stocks and shares individual savings account (ISA).

How can I choose the best passive income strategy for me?

Ultimately, the best ways to make passive income for you will be the ones you can incorporate into your life that match your risk appetite.

So, you should consider your expertise and skills and how you could monetise them for passive income.

What are the pros and cons of various passive income streams?

The passive income ideas mentioned here all have advantages and disadvantages.

Some are simple, while some are complex, and some will require considerable initial outlay.

Idea 1: An investment ISA

Every UK adult can put £20,000 a year into an ISA, where your money can grow tax-free.

By building up your ISA each year, you can create a passive income stream by investing either in portfolios of shares that make regular cash payments, known as dividends, or in a portfolio of bonds that pay a regular interest payment, known as a coupon.

The pros of having an investment ISA

• This passive income stream requires little input from you, and if you add to your ISA regularly, you could build up significant income into your bank account. Adding the maximum of £20,000 a year into your investment ISA each year could leave you with £100,000 after five years. If that paid out 5% in dividends or coupon payments, you’d have an extra £5,000 a year to help with the cost of living or pay for a holiday.

• One major pro of ISAs is that the income you derive from them is shielded from tax.

The cons of having an investment ISA

• Because of the £20,000 annual limit, building up an ISA to give you a significant income is a relatively slow burn. You’ll also have to learn about picking funds or stocks unless you hand over the management to a professional who will charge you for expertise.

• The value of your portfolio could go down, as well as up, while dividends from companies are not guaranteed, so you may not get back as much income as you expect.

Idea 2: Writing an online course

Those with specific skills could consider sharing them by writing and uploading an online course to learning platforms such as Udemy or Skillshare.

You could get paid monthly royalties depending on how many people watch the videos you make or download your resources, and the courses available are as varied, including pottery, crochet, computer programming and project management.

The pros of writing an online course

• Writing an online course requires expertise but not a large financial outlay, so if you have little money, you can still benefit from this income stream. Once the course is written, filmed and uploaded, you will receive money monthly without doing extra work if people pay for your courses, and digital platforms mean you can reach people worldwide.

• As you’re responsible for writing an online course, you have flexibility and can work on your own schedule.

• You can use your skills and experience to generate your income. If your skills address a specialist area, an online writing course can be particularly valuable to people. 

The cons of writing an online course

• Finding your niche in the oversaturated online course market is not always easy, and you may need to continue promoting your course on social media if you are to sell it successfully to make a passive income stream.

• Making courses is a time-consuming business initially and may take more time than you expect.

Idea 3: Renting out assets you already have

Whether it's your driveway, a room in your home or your designer wardrobe, using the assets you already have can give you a healthy income stream.

Websites such as Just Park, MondaytoFriday.com and Hurr can connect you with potential renters, ensuring your possessions work hard when you don’t need them.

You could also consider taking in a lodger if you have a spare room.

The pros of renting out assets

• If you own these assets already, there’s no additional outlay for you.
• There are some generous tax breaks available for those who rent their belongings. The Rent a Room scheme, for example, allows you to earn £7,500 tax-free each year. You can earn £1,000 a year tax-free with the trading allowance, designed for casual or miscellaneous income.

The cons of renting out assets

• There’s always a risk if you are renting items out that they will come back damaged, so check you’re happy with the insurance policies offered by the rental sites you are using.

• There’s also the inconvenience factor with renting out possessions, the potential for an inconsiderate lodger, or having rented out your favourite designer dress when you need it.

Idea 4: Cash savings

While interest rates are currently high, using a cash savings pot can bring in extra income, especially if you put it in your ISA to ensure your interest is tax-free.

The pros of cash savings

• There’s little work involved in putting your money into a high-interest savings account and withdrawing the interest as an income stream, and there's no risk to your capital.

• Many savings accounts allow you to access your money instantly and without penalty. 

The cons of cash savings

• Gaining an income from cash is easier when interest rates are relatively high, but when they drop, your cash flow will be affected, too.

• The value of your cash pot will also likely be eroded by inflation. Over most longer time periods, studies show that putting your money into investments is likely to produce a bigger return.

What are the risks of a passive income stream?

Depending on which form of passive income you choose, the risks to your monthly side hustle income may include a drop in the value of your assets, a lack of interest in your services or the possessions you rent out, or a drop in interest rates or dividend payments.

Ultimately, the risk is that you spend time upfront putting in the work, and then the passive income stream you wanted never materialises.

How does taxation work on passive income?

You must pay tax on passive income unless it is below specific allowances or the money is in a tax-efficient wrapper like an ISA.

If you exceed these allowances, you must complete a self-assessment tax return to inform HMRC.

You can earn the following amounts in a tax year without needing to tell HMRC

• £1,000 from property income

• £1,000 from self-employed trading

• £7,500 from renting a room in your home

• £1,000 in interest from cash savings outside an ISA, or £500 if you are a higher rate taxpayer (zero if you pay tax at the 45% additional rate)

Above these levels, you must report your income and pay tax.

How can I get started?

Creating passive income streams can be a lucrative and helpful way to add a bit extra on top of a monthly salary if you pick the right income streams to match your talents and assets and ensure you understand the tax implications.

If you would like more help with maximising your income, speaking to a financial adviser could help you to get started.

Unbiased can match you with a financial adviser for expert advice tailored to your specific needs.