It’s pretty simple to work out how much money we need for a given passive income. Let’s say £2,200 a month, and we want to earn this income through a Stocks and Shares ISA. How do we do it?

Well, we work backwards. Start with the withdrawal rate and end with the sum total. What’s the withdrawal rate? In other words, what’s a safe percentage to withdraw on a yearly basis? Many call 4% the ‘sweet spot’. That’s because taking 4% has shown to be safe over long periods, while still getting a decent slice of the pie each and every year.

Using a 4% withdrawal rate means we would need a nest egg of £660,000 for passive income of £2,200 monthly (£26,400 yearly). Now, not only is that a fair old chunk of money, but it’s way above ISA deposit limits.

That could mean a hefty tax bill that ruins our little calculation. Luckily, there’s a better way – and one that could reduce that figure substantially.

Nest egg

Outside of edge cases like lottery wins or inheritance windfalls, most of us don’t have half a million quid when we start investing. Instead, it’s a process that happens over time.

The thing is, this actually works in our favour. For one, it means not worrying about ISA deposit limits (unless you’re able to save and invest more than £20k a year – nice problem to have).

But also, the compounding from growth and dividends of our investments means we need a lot less money than doing it all at once.

For example, saving £500 a month and accruing returns of 10% from investment would need 26 years to get to the same value. The most important part? While an investor would have £660k in the account, the total amount deposited comes to only £153,892. The compounding over time like this can work wonders.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Rapid growth

One of the ways I aim to increase the holdings in my Stocks and Shares ISA is by exposure to growth stocks. Finding these exciting and disruptive companies ahead of time isn’t always easy, which is one reason I invest in Scottish Mortgage Investment Trust (LSE: SMT).

The experts at Scottish Mortgage do the hard yards for me, selecting firms from around the world with a focus on tech and other high-growth sectors. Past winners include Nvidia, SpaceX and Tesla – each bought long before they became three of the largest companies in the world.

There may be future winners in there too. Delivery company Zipline is enough to pique anyone’s curiosity – it’s pioneering delivering packages and parcels by autonomous drones. For example, dropping food or medicines into people’s gardens.

There are risks to this approach. Part of the recent success of Scottish Mortgage has been down to cheap borrowing costs allowing large amounts of investment for these often pre-earnings (or pre-revenue!) companies. With interest rates looking set to rise once more, this could put the brakes on these investment-heavy stocks.

While there’s never any guarantee this or any other stock will beat the market average, I think it’s worth considering for a Stocks and Shares ISA to try and boost a passive income plan.

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John Fieldsend owns shares in Scottish Mortgage, Nvidia, Tesla and SpaceX.