Savers using Lifetime ISAs (Lisas) are facing substantial penalties for withdrawing their money, with some charged up to £11,000, according to data obtained from HM Revenue & Customs (HMRC).
The new Labour Government is now under pressure to scrap these tax penalties for first-time buyers in the upcoming Autumn Budget.
LISAs, which are designed to help people save for their first home or retirement, impose a 25 per cent charge on unauthorised withdrawals.
This penalty not only removes the Government bonus but also takes a portion of the saver’s own funds. The issue has gained attention as house prices have surged in recent years, particularly in southern England.
The £450,000 property purchase cap for first-time buyers using LISAs has come under criticism, as it falls below average house prices in many areas.
Data from HMRC revealed that in the 2022-23 tax year, the average of the top 25 penalties for unauthorised withdrawals was £11,000.
Do you have a money story you’d like to share? Get in touch by emailing [email protected].
First time buyers are being hit with a hefty tax charge
PA
These penalties affected a significant number of savers, with 15,977 individuals having to return £1,000 or more. The severity of the charges escalated, with 6,139 savers hit by penalties exceeding £2,000.
Some 851 savers faced penalties of over £5,000. The 25 per cent charge not only removes the government bonus but also takes a portion of the saver’s own funds.
This penalty system has come under scrutiny, particularly as house prices have risen, making it increasingly difficult for first-time buyers to stay within the £450,000 property purchase cap.
The £450,000 property purchase cap for LISAs has become increasingly problematic as house prices have surged. In London, the average house price exceeds half a million pounds.
Outside the capital, several areas are approaching or surpassing the cap. Cambridge (£487,493), Guildford (£516,489), and St Albans (£584,360) are among the locations where average prices exceed the Lisa limit.
First-time buyers face the choice of either limiting their property search to areas with lower average prices or risking substantial penalties if they withdraw funds from their Lisa to purchase a home above the cap.
In the 2023-24 tax year, these LISA charges amounted to £75.2million, nearly 40 per cent higher than the previous year’s £54.3million.
This sharp rise in withdrawal charges highlights the growing number of savers facing penalties.
LATEST DEVELOPMENTS:
Britons are choosing not to save their money in ISAs, according to a new poll GETTY Rajan Lakhani, a spokesman for money app Plum, has called for significant changes to the Lisa scheme. He urged the Government to index-link the Lisa ceiling and raise the limit to around £600,000.
“These findings show how the current ceiling is shutting people out of the housing market,” Lakhani stated.
He emphasised the challenges faced by young people trying to get on the property ladder, noting that even losing £1,000-£2,000 in penalties can be a major setback for first-time buyers.
Lakhani called on Chancellor Rachel Reeves to use the upcoming Budget to “fine-tune the current Lisa LISA so young families can realise the dream of home ownership sooner.”