A growing number of UK savers are facing unexpected & extremely costly penalties after withdrawing money early from their Lifetime ISA. New HMRC data has revealed that some individuals were left paying average fines of more than £13500. This represents a significant jump compared with last year. This dramatic increase has raised serious concerns among first-time buyers and financial advisers and policymakers who argue that the current rules fail to reflect the reality of the UK housing market or the financial pressures facing younger people. Many savers said they were unaware of how harsh the 25% penalty truly is. They believed they would only lose the Government bonus. In reality the penalty also eats into their personal savings. This misunderstanding has left many shocked to find out that withdrawing money early not only wipes away the bonus but also leaves them financially worse off than if they had never opened the account.
Understanding HMRC’s Tougher LISA Withdrawal Penalties in 2025
A Lifetime ISA is a long-term savings account designed to help people between 18 and 39 save money for buying their first home or for retirement. The government adds a 25% bonus to your savings but the account comes with strict rules about when you can take money out. You can only withdraw funds without penalty in three situations: to buy your first home if it costs less than £450,000 after you turn 60, or if you receive a terminal illness diagnosis. If you take money out for any other reason you will face a 25% penalty on everything you withdraw. This includes situations like emergencies, buying a home that costs more than £450,000 losing your job or dealing with unexpected family problems. The penalty is particularly harsh because it takes back more than just the government bonus. It also removes an extra 6.25% from your own savings. This means many people end up losing significantly more money than they anticipated. Financial advisors have pointed out that these rules are not easy to understand and many savers only realize the full extent of the risks after they have already made a costly mistake.
Fresh HMRC Figures Reveal Sharp Surge in Heavy Saver Penalties
New figures from HMRC reveal a significant increase in penalties during the 2025-26 tax year. Official data shows that the 25 largest penalties averaged £13,500 compared to £10,600 the previous year. This increase stems partly from larger LISA savings balances but also from more savers accidentally breaking withdrawal rules. Among 1.6 million active LISA accounts last year more than 129,200 people received penalties while only 87,000 successfully used their funds to purchase a qualifying property. Many people who believed they were correctly working toward homeownership ended up facing financial penalties instead. This particularly affected those who tried to buy homes exceeding the £450000 price limit.
Complete 2025 Breakdown: HMRC LISA Penalty Charges and Withdrawal Trends
| Tax Year | Total Penalties Paid | Average Penalty | Savers Charged |
|---|---|---|---|
| 2023-24 | £75 million | £10,600 | Not stated |
| 2024-25 | £102 million | £13,500 | 129,200 |
| 2018-2024 Total | £213 million | Varies | 286,000 |
The Real Reason Thousands of Savers Are Triggering Penalties Under New Rules
One of the main problems behind these increasing penalties is the mismatch between Lifetime ISA rules and Britain’s rapidly changing housing market. In many areas particularly London and the South East the average starter home price goes well above the £450000 LISA limit. Buyers who try to purchase properties beyond this cap automatically face the full penalty even though they are still buying their first home. Others have no option but to withdraw early because of growing financial pressure. Many savers told HMRC they were forced to access their LISA funds because of job losses or rising living costs or emergency expenses or difficult family situations. For them the penalty felt like an extra punishment during already tough times. This view is widely shared among financial advisers.
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Rising Public Backlash and Strong Demands for HMRC LISA Rule Reform
Since Lifetime ISAs launched in 2017 they have received mixed feedback. The scheme has helped tens of thousands of people buy their first home each year. However critics say the rules are too strict and do not match the financial realities people face today. MPs and policy experts along with consumer finance campaigners want several changes. These include raising the property price limit and lowering the penalty for early withdrawals. They also want more flexibility for savers who face genuine financial difficulties. Despite the criticism the Treasury says that LISAs still help young people achieve their goal of homeownership. They point out that about 57000 buyers used them to purchase a home last year. The Government has also confirmed its plan to build 1.5 million new homes. Officials say this will help make housing more affordable for first-time buyers.
