The Lifetime ISA 25% withdrawal penalty: how a £312 charge takes £62 of your own money

How the 25% penalty actually works

The Lifetime ISA (LISA) attracts a 25% government bonus on contributions of up to £4,000 per tax year, paid into the account by HMRC (HMRC, Lifetime ISA overview). The bonus is appealing. The penalty for withdrawing the money for any purpose outside the two qualifying use cases (a first-home purchase below £450,000 or retirement at age 60) is less appealing, and is widely misunderstood.

The penalty is 25% of the amount being withdrawn, not 25% of the bonus. The withdrawal amount is the full fund value, which includes the saver's own contributions, any investment growth, and the government bonus (HMRC, Withdrawing money from your Lifetime ISA).

The arithmetic works out as a net loss of approximately 6.25% of the saver's original contributions on every non-qualifying withdrawal, even after accounting for the 25% bonus added on the way in.

The £1,000 contribution worked example

Take the simplest case. A saver contributes £1,000 to their LISA. HMRC adds a £250 government bonus. The fund value is now £1,250.

If the saver withdraws the full balance for a non-qualifying reason, the 25% penalty is applied to the £1,250 withdrawal amount:

• Withdrawal amount: £1,250
• 25% penalty: £312.50
• Net amount returned to saver: £937.50

The saver contributed £1,000 of their own money and received £937.50 back. The net loss is £62.50, equivalent to 6.25% of the original contribution. The 25% bonus did not protect the saver from being out of pocket, because the penalty rate (25%) is applied to the bonus-inflated fund value rather than the original contribution.

This is the calculation the MoneyHelper Lifetime ISA guide describes as the LISA's most consistently misunderstood feature, and the structural mechanic behind HMRC's confirmed £102 million in withdrawal penalties recorded in 2024/25 (MoneySavingExpert reporting on HMRC data).

Worked examples at different fund sizes

The 6.25% net loss ratio holds at every fund size, because both the bonus and the penalty are flat percentages.

£2,000 contributed, £500 bonus, £2,500 fund value:

• 25% penalty: £625
• Net returned: £1,875
• Net loss vs original contribution: £125 (6.25% of £2,000)

£8,000 contributed over two tax years, £2,000 bonus, £10,000 fund value (no investment growth):

• 25% penalty: £2,500
• Net returned: £7,500
• Net loss vs original contribution: £500 (6.25% of £8,000)

£16,000 contributed over four tax years, £4,000 bonus, £20,000 fund value (no investment growth):

• 25% penalty: £5,000
• Net returned: £15,000
• Net loss vs original contribution: £1,000 (6.25% of £16,000)

When the LISA is a stocks-and-shares LISA with investment growth, the loss against contributions is the same 6.25% ratio applied to the fund value, with growth treated identically to bonus and original contributions.

Calculate Your Savings Growth → (a LISA-specific penalty calculator is on the planned tools list; the savings calculator helps with the separate compound-interest question on retained LISA balances.)

When the penalty does NOT apply

Two qualifying withdrawal events allow the saver to take the full fund value, bonus included, with no penalty (HMRC, Withdrawing money from your Lifetime ISA):

1. First-home purchase below £450,000: the property price must be at or below £450,000, the LISA must have been open at least 12 months, the saver must be a genuine first-time buyer, and the funds must be paid directly to a conveyancer for the deposit or completion.
2. Retirement withdrawal at age 60 or later: the LISA can be drawn down at any rate after age 60 with no penalty and no income tax. The fund continues to earn interest or investment returns between the contribution cut-off (age 50) and withdrawal eligibility (age 60).

A withdrawal in cases of terminal illness with less than 12 months expected life is also penalty-free.

The £450,000 property price cap has not been increased since the Lifetime ISA was introduced in 2017. The result is that LISA savers in higher-value property markets, particularly London and the South East, can find their target property has crossed the cap during the years they were saving. HMRC's 2025 research found that 12% of LISA holders had withdrawn for properties exceeding the cap and triggered the penalty as a result (MoneySavingExpert reporting on HMRC data).

Reform context

Total LISA withdrawal penalties reached £102 million in 2024/25, a 35% year-on-year rise, with an average penalty of approximately £790 per affected saver (MoneySavingExpert reporting). HMRC's published research found that 22% of non-holders cited the 25% penalty as their reason for not opening a LISA, and that nearly one in three current holders would save more if the penalty were withdrawn.

Martin Lewis is among the public advocates calling for reform of the penalty mechanism, particularly the asymmetry between the 25% bonus and the 25% penalty applied to a bonus-inflated balance. The Treasury has confirmed it is consulting on a replacement first-time buyer savings product to launch from April 2028; the LISA in its current form is expected to be wound down or restructured at that point. The 2026/27 tax year may be the last in which the current penalty mechanism operates as described.

Frequently asked questions

What is the LISA withdrawal penalty rate?

25% of the amount being withdrawn. The withdrawal amount is the full fund value (contributions plus bonus plus growth), not just the bonus. The net effect is that the saver loses 6.25% of their original contributions on every non-qualifying withdrawal (HMRC, Withdrawing money from your Lifetime ISA).

Does the penalty apply if I buy a property above £450,000?

Yes. If the property price exceeds £450,000 at completion, the LISA withdrawal does not qualify for the penalty exemption and the 25% charge applies to the full withdrawal amount. The £450,000 cap has not increased since 2017.

Can I withdraw from a LISA penalty-free at age 60?

Yes. Withdrawals at age 60 or later for any purpose are penalty-free and income-tax-free. Contributions and bonus eligibility stop at age 50; the fund remains invested between those ages.

Is there any way to recover the lost 6.25%?

The lost amount is paid to HMRC as the withdrawal charge and is not recoverable. The only way to avoid the net loss is to use the LISA for a qualifying first-home purchase below £450,000 or to wait until age 60.

Is the Lifetime ISA being replaced?

The Treasury has confirmed it is consulting on a replacement first-time buyer savings product to launch from April 2028. The LISA in its current form is expected to be wound down or restructured at that point. Existing LISA holders retain their accounts and bonuses earned to date under the current rules; any replacement product's transitional arrangements have not yet been published.

Further reading

• HMRC Lifetime ISA overview: contribution limits, eligibility, bonus mechanism
• HMRC Withdrawing money from your Lifetime ISA: the penalty rules in full
• MoneyHelper Lifetime ISA guide: independent consumer guidance from MaPS
• MoneySavingExpert Lifetime ISA reporting: rate context and reform advocacy