Lifelong Isa savers hit with £11,000 fine from tax authorities – and here’s why

Some would-be first-time buyers are being hit with fines of up to £11,000 for Lifetime Isa withdrawals, data shows.

Around 74,000 savers were hit with lifetime Isa penalties between 2022 and 2023, according to a Freedom of Information by money app from Plum to HMRC.

Of these savers, 15,977 were forced to hand back £1,000 or more, 6,139 savers were fined more than £2,000, while 851 potential home buyers were fined more than £5,000.

The top 25 fines imposed by HMRC averaged £11,000 each – a significant portion of a first-time buyer’s deposit.

It comes as Lifetime Isa providers call on the Chancellor to review the product in the upcoming Budget.

Plum is urging the Chancellor to scrap lifetime Isa penalties and increase the limit on the maximum value of property that can be bought with a Lisa – which currently stands at £450,000 – to £600,000.

Moneybox is also calling on the government to ‘future-proof’ the Lifetime Isa, which would mean the property price cap is indexed and reviewed annually.

How does the Lifetime Isa work?

Lifetime Isas were launched in 2017 to help people get a foot on the housing ladder or help save for later life.

Savers under the age of 40 can open a Lifetime Isa and until they turn 50, the government will put in £1 for every £4 they save, with a £1,000 bonus given on the maximum £4,000 per year you can save.

That money can be used for a down payment on a first home, or withdrawn from age 60 to help fund retirement.

What are the sanctions?

If you withdraw money from a Lisa for a reason other than buying a first home before age 60, the government imposes a 25 percent withdrawal fee.

Any withdrawal within 12 months of your first payment will also be subject to a 25 percent government withdrawal fee.

The only other reason you can withdraw money is if you are terminally ill.

The government imposes a 25 percent penalty on the total value of the piggy bank at closure for withdrawals outside of it – which not only eliminates the 25 percent government bonus, but also some of the interest or investment growth.

While there are several reasons why savers could be penalized, the current limit of £450,000 has attracted the most widespread criticism from Lifetime Isa providers and first-time buyers.

Rajan Lakhani of Plum said: ‘There are currently dozens of local authorities across the country where the average house price is above the £450,000 limit, and that number is only set to rise in the future.’

Buyers in London, where the average house price is £536,052, are being penalized most by the Lifetime Isa cap.

There are currently 28 local authorities outside London, with averages above the £450,000 ceiling. These include Essex (£467,357), Kent (£500,569) and Hertfordshire (£584,360), according to the latest Land Registry data.

Lakhani said: “The Chancellor has put home ownership at the heart of the Labor Party’s program for government. “That’s why it makes sense to index the Lifetime Isa cap from launch and introduce a new limit closer to £600,000.”