Savers lose nearly £119m to ‘horrible’ HMRC ISA penalties

Nearly £119m was lost by Lifetime ISA (LISA) holders last year due to much-criticised withdrawal rules, new HMRC data has revealed.

Between April 2025 and March 2026, a record 154,100 people made unauthorised withdrawals from their LISA, costing an average £3,088 per saver.

The HMRC data also shows that a record 99,570 people used their LISA to purchase their first home in 2025/26, withdrawing more than £1.5bn towards purchases.

It marks the fourth year in a row that authorised withdrawals have overtaken withdrawals for the product’s intended purpose.

The government-backed scheme is designed to help first-time buyers get on the property ladder by topping up their deposits by 25 per cent, to a maximum of £1,000 extra a year. This means £4,000 can be invested in the product every tax year, with an effective ‘interest rate’ far above any savings account.

However, under the rules of the scheme, the funds can only be used to help buy the account holder’s first home. Crucially, the value of this home cannot be over £450,000 – a figure that has remained unchanged since 2017.

The average house price has risen by nearly a quarter (24 per cent) since, to £273,000 UK-wide and £553,000 in London. The current value limit would be £550,000 if it had increased at the same rate.

If a LISA holder wants to use the funds for anything else, they must withdraw them and forfeit 25 per cent of the funds back to the government.

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This mechanism means that savers are actually charged a 6.25 per cent penalty on top of their withdrawal, money experts have pointed out, as it takes 25 per cent from the total balance, rather than just removing the Treasury top ups.

Any interest or investment gains made on the LISA is also not protected from the withdrawal cost.

Campaigners say the system is now forcing many LISA holders to have to decide between buying properties which do not suit their needs, or facing the steep withdrawal penalties.

The only other option remaining to these savers is to wait until they are 60, when the funds can be withdrawn tax-free, treating them as a retirement chest.

Responding to the latest statistics, Sarah Coles, head of personal finance at AJ Bell, said they demonstrate that people should check if a LISA is the right product for them, describing the penalties as “horrible”.

She said: “Don't end up making unauthorised withdrawals that land you with a punitive charge. During the year, £119m was lost to exit charges. It shows how many people either don't fully understand the rules or are forced to raid their savings in an emergency.”

Personal finance guru Martin Lewis continues to call for the rules around LISAs to be changed, writing last year that there is a “a growing hole that needs urgently addressing”.

In June, the government detailed plans to launch a First-Time Buyer ISA which would replace LISAs and remove the effective 6.25 per cent penalty. Campaigners have called for the property value threshold to be raised for the product.

Current LISA holders are also not expected to be able to transfer their funds over to the new ISA, and instead will be able to hold them indefinitely.