HMRC Fines ISA Holders for Cash Withdrawal Rule Breach

HMRC has fined over 129,000 Lifetime ISA savers an average of £789.75 for making ineligible withdrawals, with total penalties reaching £102 million last year.

sarah

Nov 17, 2025 - 20:36

HMRC Fines ISA Holders for Cash Withdrawal Rule Breach

First-time homebuyers have been fined more than £13,500 for violating rules regarding access to their savings. Any saver who withdraws from a Lifetime ISA (LISA) for reasons other than buying their first home, being over 60, or being seriously ill will face a hefty 25 percent penalty.

In the 2024-2025 tax year, the average of all charges levied by HM Revenue & Customs (HMRC) was £789.75. The Lifetime ISA, or LISA, is a tax-free savings account where the government gives you a 25% bonus on your savings. It's for people aged 18-39 and helps them save for their first home or retirement. It also includes a 25% government bonus on contributions up to £4,000 per year, meaning you could receive up to £1,000 annually from the government. Withdrawals can be made without penalty to purchase a first home or after age 60, but other withdrawals before age 60 incur a 25% fee.

In the last tax year, savers were charged £102 million in withdrawal penalties – an increase of £75 million in 2023-2024. This increase was due to penalties being imposed on more savers and higher fees for larger amounts, with the average penalty being £790.

This included buyers who used their savings to purchase a home above the strict limit of £450,000. According to the latest HMRC data, there are currently 1.6 million active Lisa accounts. In the last tax year, 129,200 savers were charged, while only 87,000 used their savings to purchase a home.

Data obtained by the Telegraph through freedom of information revealed that last year, 129,200 LISA savers were fined an average of £789.75. From 2023 to 2024, 99,700 savers will be fined an average of £755.70. The largest fine in recent years was in the 2020-21 financial year, when 41,700 savers were fined an average of £1,032.25.

Personal finance expert Martin Lewis has supported these accounts – but he has highlighted potential pitfalls. Speaking previously on his BBC podcast, he said: "People can open a LISA on their 18th birthday, and they can keep it open until the day before their 40th birthday. That's the last time they can open it, and once it's open, it stays open."

"When you open it, it gives you a 25% increase on the amount you deposit. So if you deposit £1,000 a month, the state will add £250 that month, and that will be deposited into your Lifetime ISA account. That amount will also earn interest, and it will continue to accrue until you turn 50. Since it's only been in place since 2017, the oldest people with a LISA are 46, so we haven't reached that limit yet, so they're still getting 25% of their contributions."

"You can deposit a maximum of £4,000 per tax year, which means you can get up to £1,000 free per year, and that's accrued every year. So if you keep it for 10 years, you'll get £10,000 free from the state."

However, Martin warned that there are some "conditions" with the LISA. The first was that if you withdrew money for any reason other than your first home or retirement, you would be charged a 25% withdrawal penalty, which would reduce the bonus and cut into your original savings.

He explained: "Now, you might think that you received a 25% bonus and a 25% penalty means you're breaking even – but that's not actually the case. If you deposit £10,000 and then receive a £2,500 bonus, your account would show £12,500. But the withdrawal would result in a balance of only £9,375. In essence, your initial investment would be reduced by £625 due to the punitive withdrawal fee."

These tax-free accounts have been criticized by MPs and savings experts for being overly complex and failing to fulfill their intended purpose of helping people save for a house deposit or retirement.

The Lifetime ISA was launched in 2017 by then-Chancellor George Osborne and can be opened by people aged 18 to 39. Up to £4,000 can be saved each year, including a 25% government bonus (which can be up to £1,000).

However, savers who withdraw money for purposes other than buying a home or retirement may face a 25% penalty on the total value of their savings. This hefty penalty not only eliminates the 25% government bonus but also takes away 6.25% of the saver's own money.

Reportedly, the Treasury has collected approximately £213 million in fines from 286,000 savers due to unauthorized withdrawals in the six years up to April 2024. Savers had previously informed HMRC that they had to withdraw money due to "unforeseen changes in their circumstances," and felt the penalty "penalized them further for their misfortune."

If the £450,000 house price threshold had increased with inflation since 2017, it would now be worth £604,884. According to the Land Registry, the average house price in the UK in September this year was £272,995.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: "Lisa's role is extremely important."