Thousands of UK savers are facing staggering financial penalties from HMRC for breaking rules on how they withdraw money from their Lifetime ISAs. New data reveals the average charge for the largest withdrawal penalties has surged to £13,500, a significant increase from £10,600 the previous tax year.
The Rules Behind the Fines
Lifetime ISA (LISA) accounts are designed with strict conditions. Savers can only withdraw funds without penalty for two specific reasons: to purchase their first home, provided the property costs less than £450,000, or when the saver turns 60. Withdrawals for any other reason trigger a hefty 25 per cent penalty charge from HMRC.
The figures are stark. In the 2024-2025 tax year, 129,200 savers faced these charges. In contrast, only 87,000 people successfully used their LISA savings to buy a home, highlighting a significant gap between those saving and those able to use the funds as intended.
Experts Call for Urgent Reform
Financial analysts are urging the government to review the LISA framework, arguing that the property price cap is now outdated. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, stated: “Buying a property worth more than £450,000 will trigger the penalty. This hasn’t been touched since the LISA was introduced and in that time we’ve seen house prices soar.”
She emphasised that “People shouldn’t be penalised when they are trying to do the right thing in buying their first home, so this limit should be revisited.”
Brian Byrnes, head of personal finance at Moneybox, provided further insight, noting that the majority of their LISA savers earn between £30,000 and £40,000 annually. He revealed that “Recent analysis by CBI Economics shows the Lifetime ISA has already delivered a £1bn net boost to the Treasury. The withdrawal penalty accounts for only 8% of that boost.” This suggests the government could afford to remove the penalty without undermining the scheme's value.
Government and Industry Response
In response to the criticism, a Treasury spokesman defended the LISA, stating it “remains focused on supporting young people to achieve the aspiration of home ownership, or to build up savings for later life.” They highlighted that in the last year, the scheme helped around 57,000 people get onto the property ladder.
The government also pointed to its broader commitment to building 1.5 million more homes as a long-term solution to the housing affordability crisis. However, for savers caught by the current rules, the immediate financial pain remains a heavy burden, underscoring the need for savers to be fully aware of the strict withdrawal conditions attached to their Lifetime ISA.
