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Part of:
Best Investing UK 2026
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Lifetime ISA Withdrawal Penalties 2026: How the 25% Charge Works
TL;DR: Withdrawing from a Lifetime ISA before age 60, other than for a qualifying first home (under £450,000) or terminal illness, triggers a 25% government charge on the withdrawn amount. The 25% deducts more than the bonus added, leaving you 6.25% worse off than your original deposit. The charge is set in legislation (Finance Act 2016) and unchanged for 2026-27.
The 25% Withdrawal Charge Explained (2026-27)
The Lifetime ISA was introduced in April 2017 to help under-40s save for a first home or retirement. Government adds a 25% bonus on contributions up to £4,000/year (max £1,000 bonus). The withdrawal charge of 25% applies to the gross withdrawal amount when an unauthorised withdrawal occurs, meaning it claws back more than the bonus.
Worked example: Save £4,000, government adds £1,000 bonus, balance is £5,000. Withdraw £5,000 outside permitted purposes: HMRC takes 25% = £1,250. You receive £3,750. Your original £4,000 deposit has shrunk by £250 (6.25%) before any consideration of investment returns or interest.
When the 25% Charge Does Not Apply
| Withdrawal reason | Charge applies? | Conditions |
|---|---|---|
| First home purchase | No | Property under £450,000, residential, with mortgage, account 12+ months old |
| Aged 60 or over | No | No restriction on use of funds |
| Terminal illness | No | Medical evidence of less than 12 months expected life |
| Death of saver | No | LISA balance forms part of estate, no charge applied |
| Any other reason | Yes (25%) | Includes second home, non-residential property, cash needs, debt repayment |
Conditions verified via gov.uk Lifetime ISA guidance, updated April 2026.
The £450,000 Property Cap Has Not Risen Since 2017
The £450,000 maximum property price for LISA-funded first home purchases has remained unchanged since the LISA was introduced in April 2017. UK average house prices have risen approximately 38% over the same period (HM Land Registry). The cap now excludes a meaningful portion of London, the South East, and high-priced parts of the South West, where the average first-home price exceeds £450,000.
HM Treasury reviewed the cap in 2024 and 2025 but has not raised it. The Treasury Committee's 2024 report on housing recommended raising the cap to £600,000 outside London and £700,000 within London, but the recommendation has not been adopted as of May 2026.
LISA vs Help to Buy ISA (Closed) vs SIPP for First-Home Saving
LISA combines first-home and retirement saving in one wrapper with the 25% bonus. Help to Buy ISAs closed to new applicants on 30 November 2019; existing accounts remain operable but cannot be opened fresh. For pure retirement saving, a SIPP often outperforms LISA for higher-rate taxpayers because pension tax relief at 40% exceeds the LISA's flat 25% bonus.
For a basic-rate taxpayer saving for retirement only, LISA and SIPP produce similar net returns: both effectively turn £80 into £100 (LISA via 25% top-up, SIPP via 20% relief at source).
FAQ: LISA Withdrawal Penalties 2026
Can I withdraw the bonus from a LISA without penalty?
No. The 25% charge applies to the entire withdrawal amount, not just the government bonus. Withdrawing the bonus alone is not possible; LISA balances are pooled and any unauthorised withdrawal triggers the charge on whatever is withdrawn.
Does the 25% charge apply if my house purchase falls through?
If the LISA provider has already released funds to your conveyancer and the purchase fails, the funds can be returned to the LISA within 12 months without charge under HMRC's failed-purchase rules. You must notify your LISA provider immediately and complete returns within the time limit.
What happens to LISA savings at age 50?
You cannot make new LISA contributions after age 50, but existing balances continue earning interest or investment returns. You can withdraw without penalty from age 60. Between 50 and 60 the funds remain locked under the same 25% charge rules as before age 50.
Last reviewed: May 2026. Rules verified via gov.uk Lifetime ISA guidance and HMRC Investment Manager Manual section IFM12000, May 2026.
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HMRC penalty data: how many savers pay
- 129,200 savers paid the LISA penalty in 2024 to 2025.
- Average penalty: £789.75; total collected £102 million, up from £75 million the year before.
- Cumulative 6-year total: £213 million in withdrawal penalties since the LISA launched.
- 22% of non-holders cite the penalty as the reason they have not opened a LISA (HMRC survey, September 2025).
- £450,000 property cap frozen since 2017. Inflation-adjusted, the cap would be roughly £604,884 today, locking many first-time buyers out of London and the South East entirely.
Coming in 2028: LISA scrapped, First-Time Buyer ISA replaces it
Headline: the Lifetime ISA will be replaced by a First-Time Buyer ISA from April 2028. Confirmed details so far:
- No withdrawal penalty. The 25% charge disappears entirely under the new product.
- Retirement option removed. The new wrapper is property-only: pensions become the route for retirement saving.
- Bonus paid as a lump sum at completion, not monthly during the savings period.
- 2027 migration window. Existing LISA holders will be able to transfer to the new product without triggering the 25% penalty during a planned transition window.
- Existing rules continue until 2028. If you already hold a LISA you can keep contributing and earning the bonus under current rules through to the switchover.
