A stocks and shares ISA is a valuable asset for investors looking to earn passive income. In fact, it becomes even more important after the Autumn Budget.

The contribution limit remains at £20,000, but dividend taxes rise for investors in the basic and additional rate brackets. The difference may be more than you think.

Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, and does not constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

An investment of £20,000

From April, basic taxpayers are due to pay 10.75% on dividends over £500. So someone investing £20,000 in a portfolio yielding 5.5% would pay £64.50 on £1,100 in annual profits.

This doesn’t sound like a lot, but it adds up to £1,935 over the 30-year investment period. The situation is worse for those who want to increase their income through reinvestment.

The £500 dividend allowance remains constant as the portfolio grows, so investors don’t just pay more tax. They actually end up losing a higher percentage of their passive income.

As a result, a basic taxpayer who starts with £20,000 and reinvests at 5.5% for 30 years will end up paying £5,493. But this is not the only cost.

Investors who use ISAs for stocks and shares not only save this tax. They can also reinvest it, to give their earnings an extra boost with the money they save on taxes.

The difference over 30 years is huge. Instead of £3,776 a year from a taxable account, an investor using a stocks and shares ISA could earn up to £4,668 in annual passive income.

5.5% return

I focused on a 5.5% return in the above calculations. That’s because there are dividend stocks with this yield that I think are worth considering now.

Inventory is Admiral (LSE: ADM). It has a lower dividend yield than some other UK insurance companies, e.g Aviva or Legal and generalBut I think the corresponding risks are much lower as well.

Auto insurance is a good industry and a bad industry. It’s good because it’s non-negotiable – anyone who wants to drive has to buy insurance somewhere.

It’s bad because it’s mostly a commodity. Customers just go wherever the cheapest price is for the cover they need, and there’s not much companies can do about that.

But the Admiral has a unique advantage. Its IT products give it better data on drivers, allowing it to more accurately assess risks and maintain higher profit margins.

In any given year, insurance premiums can decline if competitors contract rates too low. But this is not sustainable, and Admiral’s better data gives it a major long-term advantage.

Investing profits

Admiral is the type of stock I think income investors should consider in portfolios. But there are other companies that also have a strong position in important industries.

The ultimate ambition should be to build a diversified portfolio. I believe UK investors can do this while maintaining a total return of 5.5%.

However, an important part of the process is taking advantage of opportunities such as stock and equity benchmarks. There’s no point in getting a big return if you have to give it up as a tax.