HMRC Is Fining Lifetime ISA Savers: The 25% Withdrawal Trap
Quick answer
More than 129,000 savers paid LISA withdrawal charges in a single year, averaging £790. Why the 25% charge takes your own money too, who it hits, and what to do instead.
Updated 27 July 2026.
HMRC charged more than 129,000 Lifetime ISA savers for breaking the withdrawal rules in the 2024/25 tax year, according to HMRC figures reported this summer, with the average saver paying a charge of nearly £790 and the largest individual bills topping £13,500. The numbers have put the scheme's 25% withdrawal charge back in the headlines, and a government consultation on reforming first-time buyer savings, including a possible successor product, is running in parallel.
Two things are worth being precise about. First, this is not a fine for wrongdoing: it is the scheme's built-in exit charge working as designed, on savers who mostly did not realise how harsh it is. Second, the charge does not just claw back the government bonus; it takes a slice of your own money too.
How the 25% charge really works
Pay £4,000 into a LISA and the government adds 25%: £1,000. But withdraw for any non-qualifying reason and HMRC charges 25% of the whole withdrawal, not just the bonus:
| Step | Amount |
|---|---|
| You deposit | £4,000 |
| Government bonus (25%) | +£1,000 |
| Pot | £5,000 |
| Non-qualifying withdrawal charge (25% of £5,000) | -£1,250 |
| You get back | £3,750, a £250 loss of your own money (6.25%) |
Only three exits avoid the charge: buying your first home for £450,000 or less (through a conveyancer, at least 12 months after your first payment in), reaching age 60, or terminal illness with less than 12 months of life expectancy. Everything else pays, including genuine emergencies.
If this is you, do this
| Situation | Meaning | Decision | Action |
|---|---|---|---|
| Buying a first home under £450,000, 12+ months after opening | The scheme works perfectly for you | Use it properly | Withdrawal goes via your conveyancer to complete the purchase; no charge, bonus kept |
| House hunting above £450,000 | Your LISA cannot fund the purchase charge-free | Stop contributing now | Redirect new savings to a cash ISA; leave the LISA growing for age 60 |
| Opened a LISA less than 12 months ago, buying soon | Any house withdrawal now is charged | Check the calendar first | Completing after the 12-month mark keeps the bonus; talk to your conveyancer about timing |
| Need the money for an emergency | 25% charge applies, taking ~6.25% of your own cash | Exhaust alternatives first | Other savings, flexible ISAs, even short 0% borrowing can be cheaper than the charge |
| No longer a first-time buyer (inherited or bought before) | Only age 60 unlocks it free | Treat it as retirement money | Compare against pension contributions, which may beat it with tax relief |
| Charged in a past year and confused why | The charge is usually correct, but errors exist | Verify the maths | 25% of the gross withdrawal is the right figure; challenge your provider if it is not |
Reform is on the table, but not the rules you hold today
A consultation on first-time buyer savings launched this summer, with a dedicated successor product under discussion and the volume of withdrawal charges cited among the reasons. Nothing has changed yet: the 25% charge, the £450,000 cap (unchanged since 2017) and the £4,000 annual limit all still apply, and any transition to a new scheme would set its own rules for existing pots. Decisions made on speculation rather than current rules are how people join next year's 129,000.
Where the LISA fits in your wider ISA picture
The £4,000 LISA limit sits inside your overall £20,000 ISA allowance, and since 2024 you can pay into multiple ISAs of the same type each year, so a LISA-plus-cash-ISA combination is straightforward. The full rules, including who can open what and the traps, are in our how many ISAs can you have guide; project bonus growth with the ISA calculator, and if the money might be needed sooner, check what unsheltered interest would cost you with the savings interest tax calculator.
Frequently asked questions
Is the 25% charge really a fine?
Legally it is a withdrawal charge, not a penalty, and providers apply it automatically. But because it exceeds the 25% bonus you received (25% off a bonus-inflated pot), it functions as a 6.25% haircut on your own contributions, which is why savers experience it as a fine.
Can I get a LISA withdrawal charge refunded?
Only if the withdrawal actually qualified (or a provider error occurred). The charge was reduced to 20% during Covid (2020/21) as a one-off; there is no hardship exemption today.
Does transferring a LISA to another provider trigger the charge?
No. Provider-to-provider transfers of a LISA to another LISA are free and unlimited. Transferring LISA money into a normal ISA, however, counts as a withdrawal and is charged.
What happens to my LISA if the scheme is replaced?
Unknown until the consultation reports. Past scheme closures (like the Help to Buy ISA) protected existing savers with transition rules; that is the likeliest pattern, but not a guarantee.
Should I use a LISA or a pension for retirement?
For basic-rate employees, a workplace pension with employer matching beats a LISA almost every time; the LISA's edge is flexibility at 60 and tax-free withdrawal. Model both with the pension tax relief calculator.
Sources
- GOV.UK: Lifetime ISA
- GOV.UK: Lifetime ISA withdrawal charges guidance
- HMRC withdrawal-charge figures for 2024/25 as reported in the financial press, July 2026
Written by
Laura Michelle Davis — Chartered Tax Adviser (CTA)
ACCA · CTA (Chartered Tax Adviser) · ATT · BSc Economics, UC Berkeley
Laura Michelle Davis is a Chartered Tax Adviser (CTA) who also holds the ACCA and ATT qualifications and a BSc in Economics from UC Berkeley. She specialises in UK personal tax, covering income tax, National Insurance, self-employment and capital gains, and has built her career making complicated rules easy to follow. At TaxFly, Laura writes and edits the tax guides and explainers, checking that figures reflect current HMRC rates and that every explanation answers the question a real person is actually asking. Her goal is plain-English clarity you can trust and act on.
