3. Rental income

Investing in property was once a popular way to generate passive income through buy-to-let arrangements. However, recent tax and regulatory changes mean it’s not so easy to make big profits – including the removal of mortgage interest relief and the 5pc stamp duty surcharge on second homes.

Ms Rimmer said: “Such moves have made it much harder to turn a profit in this space. While some landlords may still succeed, it’s now a much riskier and more complex path.”

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.

You might also choose to rent out your parking space or any other space for storage. Note that you get up to £1,000 each year in tax-free allowances for property income.

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.

Passive vs active income

Passive income is defined as income derived from a source which you play no role – or only a very minimal role – in obtaining.

David Hunter, wealth planner at Succession Wealth, said: “It can be further characterised by its flexibility because it does not require active participation, allowing you additional freedom.”

This contrasts with active income, which needs ongoing time and effort.

Mr Hunter said: “This involves you playing a more pivotal role – such as employment or self-employment. The main difference being that if you were to stop the activity, the income would also likely stop.”

Passive income FAQs

Can you make a living out of passive income?

Yes, you can – and lots of people do.

Many people in Britain live a life that is entirely funded by passive income streams.

But be under no illusion. Almost every venture requires a huge level of work and effort to get going.

You only get to reap the rewards and collect income “passively” a lot further down the line, so don’t be too hasty about throwing in the towel on the day job.

A sensible approach is to start your passive income venture as a side hustle. That way, you’ll have the security of a regular income while you work out whether you can get it off the ground.

Is it hard to make passive income?

While passive income can provide financial freedom by de-linking earnings from hours worked, it’s rarely as simple as it sounds.

Creating meaningful returns generally requires upfront effort, capital and a willingness to accept risk – especially with avenues such as property and stock markets, as both can fluctuate.

Ms Rimmer said: “In this respect, building passive income often requires a carefully planned approach that accounts for risk – and aligns with long-term financial goals.”

You also need to tread very carefully online.

Jason Witcombe, chartered financial planner at Empower Partners, said: “As passive income can be presented as trying to generate ‘money for nothing’, it’s no surprise that the internet is full of advice on passive income ‘side hustles’ or ‘get-rich-quick’ schemes. Just be careful who you believe, otherwise you could find yourself being someone else’s passive income.”

What passive income makes the most money?

Sadly there is no simple answer to this.

Mr Witcombe said: “There are ‘infinite’ ways you can generate a passive income – so it’s impossible to say which is ‘best’.”

The most sensible approach is to research the various ideas carefully to see which ones might work well for you. Always go in with your eyes open, fully aware not only of the rewards on offer – but also of the potential risks involved.

Don’t base your decision on what has worked for other people – you need to consider your own situation.