Lifetime Isa savers hit with £11,000 penalties by the taxman – here’s why

Some aspiring first time-buyers are being slapped with penalties as high as £11,000 for Lifetime Isa withdrawals, data shows. 

Around 74,000 savers were hit with Lifetime Isa penalties between 2022 and 2023, a Freedom of Information by money app Plum to HMRC shows. 

Of these savers, 15,977 were forced to hand back £1,000 or more, 6,139 savers were hit with penalties of more than £2,000 while 851 potential homebuyers were fined over £5,000.

The top 25 penalties imposed by HMRC averaged an eye-watering £11,000 each – a significant chunk of a first-time buyer’s deposit. 

It comes as Lifetime Isa providers are calling on the chancellor to overhaul the product in the upcoming budget. 

Plum is urging the Chancellor to scrap Lifetime Isa penalties and increase the limit of the maximum property value which can be purchased with a Lisa – which currently stands at £450,000 – to £600,000.

Moneybox is also calling for the Government to ‘futureproof’ the Lifetime Isa, which would mean the property price cap being index-linked and subject to an annual review.

How does the Lifetime Isa work?  

Lifetime Isas were launched in 2017 to help people get a foot on the housing ladder or help them save for later life. 

Savers under the age of 40 can open a Lifetime Isa and until they hit 50, the Government will chip in £1 for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year you can save.

That money can either be used towards a deposit on a first home or be withdrawn from the age of 60 to help fund retirement.

What are the penalties? 

If you withdraw money from a Lisa for any reason other than buying a first property before the age of 60, the Government imposes a withdrawal charge of 25 per cent.

Any withdrawals within 12 months of your first payment will also incur a 25 per cent government withdrawal charge.

The only other reason you can withdraw funds is if you are terminally ill.

The Government imposes a 25 per cent penalty on the total value of the savings pot at its closure for withdrawals outside of these – stripping out not just the 25 per cent government bonus but also a chunk of the interest or investment growth too.

While there are multiple reasons savers can be penalised, the current £450,000 cap has attracted the most widespread criticism from Lifetime Isa providers and first-time buyers. 

Rajan Lakhani of Plum said: ‘There are currently dozens of local authorities across the country where the average house price is greater than the £450,000 cap, and that number is only set to rise in the future.’

Buyers in London, where average property prices stand at £536,052 are punished most by the Lifetime Isa cap. 

There are currently 28 local authorities outside of London with averages above the £450,000 ceiling. These include, Essex (£467,357), Kent (£500,569) and Hertfordshire (£584,360), according to the latest Land Registry data. 

Lakhani said: ‘The Chancellor has put home ownership at the centre of the Labour party’s programme for government. That’s why it makes sense to index-link the Lifetime Isa ceiling from the time of its launch and bring in a new limit closer to £600,000.’