ke passive income: five ideas

Telegraph Money

Story by Esther Shaw

Woman looking at charts on her laptop

If you’re looking for a way to generate some extra cash, then you might like the idea of earning some “passive income”.

Here, Telegraph Money explains what passive income is and gives some examples of how you could make it.

• What is passive income?
• How to make passive income
• Five passive income ideas
• Passive vs active income
• Passive income FAQs

What is passive income?

Passive income refers to a source of money you earn that you don’t have to actively work for. That’s not to say that you won’t need to put in some serious time and effort in the beginning to set it up, but once that’s done it should continue to provide you with an income that’s separate from your job.

Megan Rimmer, chartered financial planner at Quilter Cheviot, said: “Passive income refers to earnings generated from sources that require minimal involvement once they’re set up.”

Traditionally, there have been a handful of options for generating passive income, notably property and investment.

These are still popular but tend to require you to put up more money to start things off

More recently, all sorts of people from different age groups and income groups are coming up with increasingly creative ways of making passive income.

How to make 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 property or 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 in.
• 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.

Five passive income ideas

There are lots of options for making passive income – some will depend on how comfortable you are, or whether you have a creative talent that people might pay for.

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

1. Investing in stocks and funds

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

Ms Rimmer said: “This highlights the benefits of an Isa for those seeking to grow passive income without being taxed heavily.”

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.