The LISA Withdrawal Penalty Is Not 25% of Your Bonus. It’s 25% of Everything.

The Lifetime ISA gives you a 25% government bonus on up to £4,000 a year, which sounds straightforwardly generous. It is, if you use it correctly. But a growing number of savers are finding out the hard way that the penalty for taking money out at the wrong time does not just claw back the bonus — it takes 25% of your total withdrawal, which means you get back less than you put in. HMRC collected £102 million in LISA penalties in 2024/25, up from £75 million the year before. Around 129,200 people were charged in that year alone.

How the bonus actually works

You can open a LISA between the ages of 18 and 39. You can contribute up to £4,000 per tax year, and the government adds a 25% bonus on top — a maximum of £1,000 free money per year. Contributions count toward your overall £20,000 annual ISA allowance. The bonus is paid monthly by HMRC into your account.

By the time you turn 50, you can have received up to £33,000 in government bonuses on top of £132,000 of your own contributions, assuming you maxed the allowance each year. In a cash LISA the money earns interest; in a stocks and shares LISA it is invested.

There are only three ways to access the money without a penalty:

• You are buying your first home in the UK, priced at £450,000 or less, with a mortgage, and your LISA has been open for at least 12 months
• You are 60 or older
• You have been diagnosed with a terminal illness and have less than 12 months to live

For anything outside those three scenarios, the 25% withdrawal charge applies.

Why the penalty is worse than it sounds

Most people assume the 25% penalty just gives back the 25% bonus. That is not what happens. The penalty is calculated on the total withdrawal amount, not just the bonus portion. So when you withdraw, you are withdrawing your original contributions plus the bonus that was added to them — and the 25% charge comes off that combined total.

The government bonus is expressed as 25% of your contribution, but the penalty is expressed as 25% of a larger number. The maths are asymmetric and most people do not realise this until they are hit with the charge. If your money has grown inside the LISA through interest or investment returns, the picture changes — growth above 6.25% on your own contributions would mean you still come out ahead. But in a cash LISA at current rates, contributions made recently may not have earned enough to cover the loss.

The four situations where people get trapped

Buying a home above £450,000. The property cap has been frozen at £450,000 since the LISA launched in April 2017. Average UK house prices have risen 34% since then. In London and the South East, average first-time buyer prices were already above £450,000 when the product launched. There is a particularly awkward mismatch here: first-time buyer stamp duty relief applies on properties up to £500,000, so the government simultaneously helps and penalises buyers in that £450,000 to £500,000 range.

Buying jointly with a homeowner. Both buyers in a joint purchase must individually meet LISA eligibility criteria. If your partner already owns a property, you cannot use your LISA for the purchase without paying the penalty. This catches people in relationships where one person is a first-time buyer and the other is not.

Changing plans before 60. Life changes. If you opened a LISA in your late 20s with the intention of buying and then decide you want to use those savings for something else — a career change, moving abroad, or starting a business — you cannot access the money without losing more than you put in. There is no hardship exemption. HMRC reduced the penalty temporarily to 20% during the pandemic (March 2020 to April 2021), which meant savers could at least get their own money back. That temporary reduction has since ended.

Not holding for 12 months. You must have funded your LISA for at least 12 months before using it for a property purchase. The clock starts from the date of your first contribution, not the account opening date. Open an account and find a home within that window, and the funds cannot be used penalty-free.

What is changing

The government is consulting on a replacement for the LISA focused specifically on first-time buyers, with the retirement savings element likely removed for new savers. A consultation was confirmed in the Autumn Budget 2025, and a new product is expected around 2028. The current LISA will remain open for contributions until any replacement launches.

There is pressure from the Treasury Committee and from campaigners to reduce the penalty to 20%, which would mean withdrawals forfeit only the bonus without eating into your own money. As of April 2026, no change has been made and the penalty remains at 25%. There is also pressure to raise or unfreeze the £450,000 property cap — if it had risen with inflation since 2017, it would now sit at roughly £600,000. No change has been confirmed yet.

Should you open one in 2026?

The LISA is still worth opening if you meet two conditions: you are confident you will buy a home priced at £450,000 or under, and you would not need to access the money for anything else before you either buy or turn 60.

If you are buying outside London and the South East, the property cap is less likely to be a problem. The average first-time buyer price in the East Midlands and Yorkshire is well below £450,000. If you are buying in London or any major city centre where prices regularly exceed £450,000, think carefully before locking money into a LISA — the bonus is generous but worthless if you end up paying it back plus a chunk of your own savings.

If you are using a LISA for retirement rather than a home, the 25% bonus tax-free from age 60 is an attractive proposition, particularly for the self-employed who do not benefit from employer pension contributions. One more thing worth knowing: if you already have a Help to Buy ISA and a LISA, you can hold both, but you can only use the government bonus from one of them for a property purchase.

The bottom line

The LISA bonus is genuinely good value if you use the account for its intended purpose. The problem is that the rules are strict, the penalty is punitive in a way most savers do not fully understand until it is too late, and the £450,000 property cap has not moved in nine years while house prices have. HMRC collected over £213 million in penalties across the six years to 2025. Those are not people gaming the system — many of them are first-time buyers who found the cap caught them out. If you are considering opening a LISA, run your numbers carefully before you commit money you might need elsewhere.