Lifetime ISA: the bonus, the penalty, and what's changing
Up to £1,000 a year of free money, and the strictest exit rules of any ISA. Both deserve equal attention.
The Lifetime ISA gives you free money — up to £1,000 a year of it — and also carries the harshest penalty in the ISA family. Both facts matter, and the scheme is now scheduled to be replaced. Here is the current position.
The rules as they stand
- Who: UK residents aged 18–39 can open one. You can keep paying in until 50.
- Limit: £4,000 a year, which counts towards your £20,000 overall ISA allowance.
- Bonus: 25% from the government — up to £1,000 a year, paid monthly.
- Penalty-free use: a first home costing £450,000 or less, or any purpose from age 60.
- Anything else: a 25% withdrawal charge.
Why the 25% penalty takes more than the bonus
This is the part that catches people, and the arithmetic is worth doing slowly. The government adds 25% to what you put in. But the withdrawal charge takes 25% of the resulting total — bonus and your own contributions alike.
Pay in £4,000 and you receive a £1,000 bonus, giving £5,000. Withdraw it for a non-qualifying reason and the charge is 25% of £5,000, or £1,250. You get back £3,750 — which is £250 less than you originally put in. The penalty does not simply claw back the bonus; it takes roughly 6.25% of your own money on top.
The £450,000 cap is the real risk
The property price limit has been £450,000 since the scheme launched in 2017 and has never been raised, while house prices have moved considerably. If you save for years and then buy a first home above the cap, the withdrawal does not qualify and the charge applies in full.
Two further conditions catch people out: the account must have been open for at least 12 months before a qualifying property withdrawal, and the purchase must involve a mortgage. The 12-month clock runs from your first payment in, not from the day you opened it.
What's changing
At the Autumn Budget 2025 the government announced that the Lifetime ISA would be replaced by a new first-time buyer ISA, and launched a consultation on the replacement in June 2026. The new product is not expected until around April 2028, and indications are that it would remove the withdrawal penalty.
Crucially, nothing has changed yet. The 25% charge, the £450,000 cap and the 25% bonus all still apply. Existing holders can keep contributing indefinitely, and eligible savers can still open a new LISA before any replacement arrives. If you are 39 and eligible, the window closes on your 40th birthday regardless of what happens in 2028.
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LISA or pension for retirement?
For a basic-rate taxpayer the two are broadly comparable on the way in: the LISA's 25% bonus and basic-rate pension tax relief both effectively add 25% to your money. The LISA then wins on the way out, because withdrawals from 60 are entirely tax-free, whereas 75% of a pension withdrawal is taxable as income.
For a higher-rate taxpayer the pension is usually stronger, because 40% relief is worth considerably more than a 25% bonus. And if your employer matches pension contributions, that match beats both — turning it down to fund a LISA is almost always the wrong order.
Who the LISA suits
- Strong fit: a first-time buyer, under 40, fairly confident of buying within the price cap in the next few years.
- Reasonable fit: a self-employed basic-rate taxpayer with no employer pension, using it as a retirement supplement.
- Poor fit: anyone who might need the money for something else, or who is likely to buy above £450,000.
See what the bonus does over time
£4,000 a year plus a £1,000 bonus compounds faster than most people expect. Model it alongside your other savings.
Open the ISA calculator →Common questions
How much is the Lifetime ISA bonus?
25% of what you pay in, up to £1,000 a year on the maximum £4,000 contribution. It is paid monthly, usually within six to eight weeks of your contribution.
What happens if I withdraw from my LISA early?
Unless it is for a qualifying first home or you are 60 or over, a 25% government withdrawal charge applies to the whole amount withdrawn. Because it is charged on the total including the bonus, you can end up with less than you originally paid in.
Is the Lifetime ISA being scrapped?
It is scheduled to be replaced by a new first-time buyer ISA, with a consultation launched in June 2026 and the replacement not expected until around April 2028. Current rules still apply in full, existing holders can keep contributing, and eligible savers can still open one.
Can I use a LISA for a house over £450,000?
You can withdraw the money, but it would be treated as a non-qualifying withdrawal and the 25% charge would apply. The cap has not changed since 2017.