I’m using my £20k ISA allowance to generate passive income from FTSE 100 shares

This year’s ISA allowance expires at midnight on 5 April and I’m keen to take this chance to generate tax-free passive income from top UK shares. I don’t have enough money to max out my full £20k allowance, but I’ll invest what I can.

I work on the principle that investing something is better than investing nothing. I’ll admit it, the ISA deadline isn’t as pressing as it was in the days when it was just £7,000. Today’s £20,000 allowance is so big, only the wealthy will use it all up.

I’m hunting for passive income today

So I could simply give it a miss this year, and say I’ll invest in an ISA next year. There’s a word for that, though. It’s called procrastination. And here’s another broad investment principle. It’s always better to invest today than tomorrow.

The earlier I invest, the longer my money has to grow, and the more the passive dividend income I’ll hopefully generate. So I’m using the deadline as an incentive to take action now.

Another reason I’ll act today is that the ISA allowance may not always be with us, especially at today’s level. As we’ve seen lately, tax raids can happen at any time. So I won’t take it for granted, but will use it to generate the maximum passive income I can while I can.

All the capital gains I generate from my Stocks and Shares ISA will be free of tax, for life. As will my dividends, which I plan to reinvest for growth while I’m still working. After I retire, I’ll draw them as passive income, to top up my State Pension. That will be tax-free too.

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This is a scary time to invest in shares, as inflation makes everybody feel poorer and the Russian invasion of Ukraine shakes the world. I’m surprised the stock market hasn’t crashed yet. It may soon do so. The good news is that I don’t have to invest all my ISA money immediately. I could just move it into cash before the deadline, to secure my allowance, then wait for opportunities to arise.

These FTSE 100 stocks have amazing yields

Once I’ve moved money into a Stocks and Shares ISA, I will have a real incentive to start hunting around for top passive income stocks. I will start my search on the FTSE 100, but I won’t overlook the FTSE 250. There are plenty of top income opportunities there too.

I will probably begin with a few defensive stocks, say, Unilever or Diageo, and possibly a utility such as National Grid. Then I’ll edge up the risk scale, hoping for a higher return. Right now, there are some passive income stocks on whopping yields. I’m thinking of Phoenix Group Holdings (7.64%), Imperial Brands Group (8.60%) and Persimmon (10.72%).

Something tells me that level of passive income may be too good to be true. I’ll be looking into it. Both before April 5 and afterwards.