How to invest for income

What is investment income?

Investment income is any profit or interest you get from investments, without selling them. 

It could include dividends paid by a company, or even interest paid on a savings account.

Income from investments is taxed differently to income from work, and may have fees or costs associated.

Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.

Sign up to Which? Money - and get a £10 voucher

Grow your money with our expert guidance. You’ll get a £10 Amazon.co.uk gift card when you take out an annual membership before 14 May 2025.

Sign up now

What is the best investment for regular income?

Dividend-paying stocks

When you invest in some companies, you'll get a regular payment, known as a dividend.

As you decide what to invest in, you can look for the 'dividend yield' which will show as a percentage how much you'll get back in a regular payment (learn more about to look out for here).

But, there are no guarantees that the yield you see when you first buy into a share will stay the same. For example, many companies - including most big UK high street banks - halted payments of dividends to investors during the Covid-19 pandemic.

Some companies will offer a ‘share buyback’ scheme, in which a company buys back some if its own shares, reducing the number of shares held by investors. Remaining shareholders get a bigger stake in the company because the number of total shares available is reduced, and therefore get a higher dividend as a result.

Bonds and gilts

When you invest in bonds and gilts, you’re effectively lending money to a government or company. In exchange, you'll receive regular interest payments - for example, twice a year. 

The interest you'll receive on a bond is referred to as the 'coupon', and tells you what percentage of your initial investment you'll receive each year.

Gilts are a type of bond that's issued by the UK government. They're exempt from capital gains tax (CGT) if you sell your holding and make a profit, although income from gilt interest is subject to income tax. 

The downside of bond or gilt investments is that they typically don't offer an opportunity for your investment to grow, like an investment in stocks would.

Bonds with dates further in the future tend to offer higher yields, as they're at higher risk of interest rate changes. You can invest in bonds or gilts with a variety of end dates, which will have different coupons, to mitigate these risks.

• Find out more: Investing in bonds explained 

Funds

You can invest in multiple dividend-paying stocks, bonds or gilts - or a mix of all three - by investing in funds.

You can find these funds by looking for those with words like 'income' or 'dividend' in their name.

The benefit of a fund over choosing individual shares is that a fund tends to hold hundreds or even thousands of shares, which will keep your investment balanced if anything goes wrong with an individual company.

You can also invest in money market funds which invest your money in cash or short-term loans to governments (Treasury Bills or T-Bills) that pay a fixed interest rate.

Unlike investing directly in shares, bonds, or cash, you'll have to pay an annual management fee for a fund - which can differ significantly from one fund to another.

• Find out more: Investment funds explained 

Investment trusts

Like funds, investment trusts can invest across a range of stocks and offer some diversified income.

When you buy a share of an investment trust, you become a shareholder of that trust which is listed on the stock exchange.

Investment trusts can hold back dividend income from holdings. While this might reduce dividend income in good years, it means trusts can still pay dividends in bad years.

Some trusts have even consistently if gradually increased the dividends they pay shareholders for several decades, though there's no guarantee they'll always increase or indeed pay a dividend.

Investment trusts will incur management charges, which can be high as most investment trusts are actively managed.

• Find out more: Investment trusts explained 

Property

Becoming a private landlord is a popular means of building a secondary stream of income, but it's far less passive than other types of investing.

You’ll need to familiarise yourself with private rental laws and regulations and, unless you pay an agency, you'll need to find tenants and be available when your tenants need you.

Like funds, you'll also have costs beyond your initial investment. This includes necessary routine property maintenance and urgent ad-hoc repairs - that could be anything from clearing mould to fixing broken pipes. You'll also face high buy-to-let mortgage rates if you're not buying the property outright.

You can alternatively invest in property through real estate investment trusts (REITs), where you will own a share of property but not be the landlord. These types of trusts are riskier than others, in part because it is harder to sell the underlying real estate investments if investors withdraw their money.

• Find out more: Commercial property investment explained 

How do you build a passive income for the long term?

When building a secondary income, you need to consider the risk you can take for your financial needs and goals. 

If you’re interested in taking an income for retirement, for example, it might suit you better to have a slightly lower-risk strategy, so that you don’t unexpectedly lose money you need to live on.

It's possible to take an income from your investments that includes part of its ‘capital value’ (how much the assets would be worth if you sold them), as well as any dividends. 

Let's say, for example, you invest £50,000 in assets that pay annual dividends of 3% (equivalent to £1,500), but you need an annual investment income of £2,000. You could choose to also withdraw the extra by selling investments. This would equate to 4% in the first year, and potentially more than this in subsequent years (subject to the investments' performance).  

If, each year, your investment grows by less than you withdraw, your money will eventually run out. While this may be part of the plan – if you're using it to fund retirement, say – you might need money leftover for extra costs, like later life care.

• Find out more: How to invest: a beginner's guide 

Should you get independent investing for income advice?

It might suit you best to work with an independent financial adviser if you're not confident choosing investments for yourself. 

They would help you choose which investments would suit your situation and your own personal appetite for risk. You'll get personalised advice that takes into account your circumstances, but fees can be high.  

If your situation is fairly straightforward, lower-cost alternatives include digital ‘robo-advisers’ and managed Isas. With these platforms, you'll usually need to answer series of questions to determine your goals and risk appetite to be matched to investments. 

While cheaper, these solutions lack the same personalisation and human touch you get with an independent financial adviser.

• Find out more: How much financial advice costs 

How much tax do you pay on investment income?

You can invest up to £20,000 each tax year in an Isa, and any dividends and returns on shares and bonds held in an Isa will be tax-free.

For investment income outside of an Isa, the amount of tax you pay on your investments will relate to what income tax band you're in. There are also allowances for the maximum you can make before paying tax.

You'll be liable for different taxes depending on the type of return or dividend generated:

• capital gains tax on profits from the sale of investments above £3,000
• income tax on interest from bonds and gilts above £1,000 a year (basic rate taxpayer) or £500 (higher-rate) or £0 (additional-rate)
• dividend tax on any income from dividends above £500

How can you get a guaranteed income?

Because investments can grow, they can provide an income that can last decades. They can't, however, provide a guaranteed income - any investments that claim they can are likely to be scams. 

If you're looking for a guaranteed income you'll need to keep your money in a fixed-rate savings account, cash Isa or annuity. You won't be at risk of losing money in the same way as investing, but your money might lose value if inflation grows faster than your savings interest or annuity income.

With a fixed-rate account or cash Isa, the interest rate is only fixed for a certain number of years, which can affect the income you'll get. With an annuity the rate of income you get is set for the rest of your life, though some annuities incomes rise with inflation.

You'll receive compensation up to a maximum of £85,000 Financial Services Compensation Scheme (FSCS) per provider if the bank holding your money with goes bust. If you have more than this to put in a savings account, you could consider spreading your money across providers. Annuities also get FSCS protection, but with no upper limit.

You don't have to choose between investing, saving and annuities, and many people will hold all three.

• Find out more: Best annuity rates 

More on investing for income