Thousands of first-time buyers received penalties exceeding £13,500 after breaking Lifetime ISA withdrawal rules, according to new HMRC figures showing enforcement has reached record highs this year.
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Record £102 Million Collected in Penalties
HMRC collected £102 million in withdrawal charges during the 2024-25 tax year, up 36% from £75 million the previous year. The 25 largest individual penalties averaged £13,500 each, compared to £10,600 in 2023-24.
In total, 129,200 savers faced charges during the tax year, while only 87,000 successfully withdrew funds to purchase homes. With 1.6 million active accounts, the proportion of savers who face penalties grows each year. The average charge was £790, though amounts vary based on pot size.
Understanding the 25% Withdrawal Charge
The tax-free Lifetime ISA scheme allows withdrawals without penalty in three circumstances only:
- Buying a first home priced under £450,000
- Reaching age 60
- Receiving a terminal illness diagnosis with less than 12 months to live
Any other savings withdrawal triggers a 25% charge on the full pot value. This doesn’t just remove the government’s 25% bonus. The penalty also takes 6.25% of your own contributions.
Example: Save £800 + receive £200 bonus = £1,000 pot. Withdraw everything = pay £250 penalty = receive £750 (£50 less than you saved).
LISA holders worried about the £450,000 limit should check average property prices in their area before continuing contributions. Those buying in expensive regions should reconsider if a LISA still makes sense for their home purchase plans.
The scheme runs alongside the now-closed Help to Buy ISA, which stopped accepting new applications in November 2019.
The Frozen £450,000 Cap Creates Problems
George Osborne introduced Lifetime ISAs in 2017 for savers aged 18-39, with a £450,000 property price limit. That threshold has never been adjusted despite significant house price rises.
If the cap had tracked inflation from launch, it would now stand at £604,884. Average UK house prices reached £272,995 in September 2025, Land Registry data shows.
Over 10% of local authority areas now have average first-time buyer prices above the £450,000 ceiling. Areas like St Albans in Hertfordshire (£584,360), Sevenoaks in Kent (£500,569), and Brentwood in Essex (£467,357) leave buyers facing difficult choices: purchase a suitable home and forfeit savings through penalties, or buy below their needs to access the bonus.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “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. 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.”
Calls for Reform Grow Louder
Between April 2018 and April 2024, the Treasury collected approximately £213 million in penalties from 286,000 unauthorised withdrawals. Telegraph reporting showed savers told HMRC that unexpected circumstances such as job loss, relationship breakdown, and family illness forced early access to funds.
Brian Byrnes, head of personal finance at Moneybox, said: “The majority of our Lisa savers earn between £30,000 and £40,000 a year, placing them at the heart of the affordability challenge.”
Analysis by CBI Economics found the Lifetime ISA delivered a £1 billion net boost to the Treasury. According to the analysis, withdrawal penalties account for just 8% of that total.
Government Defends Current Rules
A Treasury spokesperson said: “The Lifetime Isa remains focused on supporting young people to achieve the aspiration of home ownership, or to build up savings for later life, and in the last year helped around 57,000 people get onto the property ladder.”
The government has committed to building 1.5 million new homes to help make housing more affordable for first-time buyers across the UK.
MPs on the Treasury Select Committee questioned whether the scheme effectively targets people who need support. Earlier in 2025, the committee urged Chancellor Rachel Reeves to review whether the product should continue in its present form, warning its dual purpose may push people away from more suitable savings options.
The Office for Budget Responsibility estimates Lifetime ISA bonuses will cost approximately £3 billion between now and 2029-30.
What This Means for Savers
With penalties reaching record levels and house prices rising beyond the frozen cap, Rachel Reeves faces pressure to reform rules that create difficulties for savers pursuing home ownership.
Before committing further funds to a Lifetime ISA, savers need to check whether homes in their target area typically sell above the £450,000 threshold. Properties above this limit mean forfeiting both government bonuses and part of your own savings through penalty charges.
