Lifetime ISA Penalty Calculator UK 2026/27

How the 25% penalty actually works

The Lifetime ISA was launched in April 2017 as a way to help under-40s save for either a first home or retirement. The government adds a 25% bonus to every contribution — up to £1,000 a year on a £4,000 annual contribution. In return for that bonus, HMRC applies a 25% charge on any withdrawal made outside the permitted reasons. That charge sounds like it just claws back the bonus. It doesn't.

The maths is straightforward but counter-intuitive. Suppose you contribute £1,000. The government adds £250, taking your balance to £1,250. If you then withdraw the lot, the 25% penalty is calculated on the full £1,250, not on the £250 bonus alone. You pay a £312.50 penalty and walk away with £937.50 — that is, £62.50 less than the £1,000 you originally put in. The bonus is gone and an extra 6.25% of your contribution is gone with it.

This is why financial commentators describe the LISA early-withdrawal cost as "effectively 6.25%, not 25%". Both numbers are correct. The 25% is the statutory charge; the 6.25% is what it costs you against your original contribution once the bonus and penalty net out.

When the penalty doesn't apply

Three scenarios where the 25% charge is waived in full:

• Buying your first home — providing the property is for you to live in, costs no more than £450,000, you have held the LISA for at least 12 months, and you're using the funds via a conveyancing solicitor.
• Reaching age 60 — at 60 the LISA effectively becomes a pension-like wrapper. You can withdraw the full balance, tax-free, with no penalty.
• Terminal illness — diagnosed with less than 12 months to live, with a registered medical practitioner's confirmation.

Any withdrawal outside those three reasons triggers the 25% charge. There is no "small amount" exemption and no hardship exception.

Worked examples

Example 1 — Withdrawing the lot after one year

Sarah opens a LISA and contributes £4,000 in the first year. The government adds £1,000, taking her balance to £5,000. Six months later she changes her mind and withdraws everything (not for a first home). The 25% charge is £1,250. She receives £3,750. Sarah's loss against her original £4,000 contribution is £250 — exactly 6.25%.

Example 2 — Partial withdrawal mid-way through saving

Tom has been paying in for three years. His balance is £15,000 — roughly £12,000 of contributions and £3,000 of bonus. He needs £6,000 urgently and withdraws that amount (not for a first home). The penalty is £1,500, leaving him with £4,500. The £6,000 he withdrew represents £4,800 of contributions and £1,200 of bonus. Against his £4,800 contribution to the withdrawn portion, he's £300 down — again 6.25%.

Example 3 — Withdrawal to buy a property over £450,000

James has £30,000 in his LISA and is buying a £475,000 first home. The property exceeds the £450,000 cap, so the entire withdrawal is treated as unauthorised. James faces a £7,500 penalty if he withdraws to fund the deposit. He would be better off either negotiating the price below £450,000, or leaving the LISA invested and using other savings for the deposit.

The hidden penalty: opportunity cost

The 6.25% direct loss is the visible cost. The less obvious cost is opportunity. Money you would otherwise have invested or saved in a regular ISA earns growth that's never recovered. Over five to ten years, the cumulative gap between a LISA-with-penalty outcome and a regular savings account can be material.

The right comparison is: "If I'd put this money in an easy-access savings account instead of a LISA, where would I be?" For first-time buyers genuinely on track to use the funds for a home purchase under £450,000, the LISA almost always wins. For everyone else, the comparison gets closer the longer the time horizon.

Avoiding the penalty

Three rules of thumb:

1. Only contribute what you genuinely plan to use for a first home under £450,000 or for retirement after 60. Treat any other use as paying 6.25% to access your own money.
2. Keep an emergency fund elsewhere — in an easy-access savings account or Cash ISA. The LISA is not an emergency fund, because emergencies almost always trigger the penalty.
3. Watch the property value cap. The £450,000 limit hasn't moved since the LISA launched in 2017. With UK house price inflation, more buyers are bumping against it. If you're in London or the South East and saving for a first home, double-check your target price.

Choosing a provider

If you're still in the saving phase, see our Best Lifetime ISAs UK comparison. The right provider depends on whether you want a Cash LISA (interest-bearing, lower risk) or a Stocks and Shares LISA (investment-based, suitable for retirement-horizon LISAs), and on platform fees that compound over the decades the wrapper might be open.

Frequently asked questions

Is the LISA penalty really 25% of my withdrawal?

Yes. The 25% government withdrawal charge is applied to the full amount withdrawn, including your contributions, any 25% government bonus, and any growth. The mechanics are simple — the cost is bigger than it first looks.

Why do people say the penalty is effectively 6.25%, not 25%?

Because of how the 25% bonus and 25% penalty interact. A £1,000 contribution plus £250 bonus is £1,250. A 25% penalty on £1,250 is £312.50, leaving £937.50 — £62.50 less than your original £1,000. That £62.50 is 6.25% of your original contribution. You lose the bonus and roughly 6.25% on top.

When does the penalty not apply?

Three exceptions: buying your first home up to £450,000 (after 12 months of opening the account), reaching age 60, or being diagnosed as terminally ill with less than 12 months to live. Outside these scenarios, the 25% withdrawal charge applies.

Do I lose just the bonus, or more?

More. The 25% penalty is calculated on the total withdrawal, including the bonus, so you lose the bonus plus an additional ~6.25% of your original contribution.

What if I only made a small contribution and didn't earn the full bonus?

The penalty is still 25% of the amount you withdraw. If your balance is mostly contributions with little bonus, you'll lose slightly less than the full 6.25% effective rate, but you still lose more than just the bonus.

Can I transfer my LISA to another ISA to avoid the penalty?

Transfers to a regular Cash ISA or Stocks and Shares ISA still trigger the 25% withdrawal charge. The only penalty-free transfer is to another Lifetime ISA provider.

What happens to my LISA at age 50?

Contributions stop at age 50 — you can no longer pay in or earn the bonus — but the account stays open. You can continue holding it, the money can keep growing, and from age 60 you can withdraw without penalty.