Mortgage question
Lifetime ISA penalty: how does the 25% withdrawal charge actually work?
The 25% charge is applied to the full withdrawal amount, not just the government bonus, so you always end up with about 6.25% less than your own contributions. Pay in £4,000, get a £1,000 bonus, withdraw the whole £5,000 and HMRC claws back £1,250 — leaving you with £3,750. Only qualifying first homes, age 60+, or terminal illness escape the charge.
Why 25% out is worse than 25% in
The maths surprises people every April. Government adds 25% on the way in, then takes 25% off a bigger total on the way out, and the extra slice comes straight from your own money. A quick worked example with the LISA annual maximum of £4,000:
- You pay in £4,000.
- HMRC pays in a 25% bonus of £1,000, taking the pot to £5,000.
- You make an unauthorised withdrawal of £5,000.
- The 25% charge is 25% of £5,000 = £1,250.
- You receive £3,750 — £250 less than the £4,000 you originally put in.
That £250 is 6.25% of your own contribution. The proportion stays the same whatever size the pot: withdraw £10,000 and you will lose £625; withdraw £20,000 and you will lose £1,250. The charge is paid to HMRC by your LISA provider, not kept by the provider — so there is no “fee” negotiation to be had.
The three ways to take money out with no penalty
- Qualifying first home. You must be a first-time buyer (never have owned residential property anywhere in the world), the property must cost £450,000 or less, you must be buying with a residential mortgage, and the LISA must have been open at least 12 months. Your conveyancer requests the funds directly from the provider.
- Age 60 or over. From your 60th birthday the full pot — contributions, bonus and any investment growth — is available tax-free with no charge.
- Terminal illness with less than 12 months to live. A medical declaration allows the full pot to be paid out free of the charge.
Anything else — topping up a deposit on a £455,000 house, paying off debt, funding a wedding, emergency cash — triggers the 25% charge on the whole withdrawal, including growth.
Worked examples at different pot sizes
The table below uses HMRC’s rules as they stand in April 2026. Note the charge applies to the total value on the day of withdrawal, including any investment growth — so stocks-and-shares LISAs that have done well face a bigger cash penalty in absolute terms.
| Your contributions | 25% bonus | LISA value | 25% charge | You receive | Loss vs your own money |
|---|---|---|---|---|---|
| £1,000 | £250 | £1,250 | £312.50 | £937.50 | £62.50 (6.25%) |
| £4,000 | £1,000 | £5,000 | £1,250 | £3,750 | £250 (6.25%) |
| £10,000 | £2,500 | £12,500 | £3,125 | £9,375 | £625 (6.25%) |
| £20,000 + £3,000 growth | £5,000 | £28,000 | £7,000 | £21,000 | £2,000 (10% of your contributions) |
Use our LISA vs regular savings calculator to model your own numbers and compare with a standard ISA before you withdraw.
When the penalty is still worth paying
Sometimes the 6.25% hit is cheaper than the alternative. A buyer stuck at £455,000 might still come out ahead taking the charge rather than forcing themselves into a less suitable home. The same goes for a sudden job loss where the LISA is your only buffer and a 0% credit card would cost more in fees and stress. Run the numbers both ways, and read our companion pages on the £450,000 price cap and the 12-month holding rule before committing.
Common misconception: “The penalty just reclaims the bonus”
It doesn’t. A true bonus clawback would be 20% of the pot (the bonus was 25% of your contribution, which is 20% of the grown total). The government chose 25% deliberately so that withdrawers give back the bonus and a small penalty on their own money — otherwise the LISA would be a free tax wrapper with a guaranteed 25% return. If the rumoured 2028 First-Time Buyer ISA arrives, Treasury documents suggest the clawback rate could drop to 20%, but that has not been legislated as of April 2026.
This is information, not regulated financial advice. If the penalty decision is marginal, speak to an independent adviser.
Sources
Information, not regulated advice. Mortgage Notes is not an FCA-authorised mortgage adviser. For a recommendation on your specific circumstances, speak to an FCA-authorised broker.