How the Lifetime ISA bonus works, and the charge that can eat into it

For many families, the Lifetime ISA first comes up over Sunday lunch, when a grown-up son or daughter mentions they are saving for a deposit and the government is “adding a quarter on top”. That part is true. What tends to come up later, sometimes years later, is the charge for taking the money out for anything other than a first home or retirement.

The Lifetime ISA, or LISA, is generous when used as intended and expensive when plans change. This guide explains how the bonus is calculated, the age and property rules, the withdrawal charge, and the changes the government set out in the Budget published on 28 October 2026.

How the 25% bonus is worked out

You can pay up to £4,000 a year into a Lifetime ISA, and the government adds a 25% bonus on what you pay in, up to £1,000 a year. Pay in £2,000 and the bonus is £500; pay in the full £4,000 and it is £1,000. The money can be held as cash, stocks and shares, or a mix, depending on the provider.

The £4,000 counts towards your overall annual ISA allowance rather than sitting on top of it. The bonus is paid into the account itself, so it can earn interest or investment growth alongside your own contributions.

The age rules that catch people out

According to GOV.UK, you must be 18 or over but under 40 to open a Lifetime ISA, and you must be resident in the UK. Three age points matter after that:

• Before 40: you must make your first payment before your 40th birthday. Opening an account is not enough on its own.
• Up to 50: you can keep paying in, and earning the bonus, until you are 50. After that no more payments or bonuses, but the account stays open and can keep growing.
• From 60: you can take the money out for any reason without a charge.

So someone who opened an account at 39 could receive bonuses for around 11 years, then must leave the money untouched until 60 unless they buy a first home or another exception applies.

Using it for a first home

To use your savings and bonus towards a first home without a charge, GOV.UK says:

• the property must cost £450,000 or less;
• you must buy at least 12 months after your first payment into the Lifetime ISA;
• you must be buying with a mortgage, and not a private one from a close relative;
• the money goes from your provider to your conveyancer or solicitor, not to you.

Two first-time buyers can each use their own LISA towards the same home, as long as both meet the conditions. If you also hold a Help to Buy ISA, you can use the government bonus from only one of them for your first home. Stamp Duty is a separate cost, covered in our guide to what Stamp Duty costs now the thresholds have dropped back.

Why the 25% charge costs more than the bonus

Apart from a qualifying first home, reaching 60, or being terminally ill with less than 12 months to live, any withdrawal is “unauthorised” and carries a 25% charge. The same applies if you transfer the money to another type of ISA before 60. If the account holder dies, it ends with no charge.

The catch is the arithmetic. The bonus is 25% of what you pay in, but the charge is 25% of everything you take out, bonus included. GOV.UK’s own example: £800 of savings plus a £200 bonus makes £1,000; withdrawing it all costs £250, leaving £750. That is £50 less than the saver put in, before any interest or growth.

A worked example with one year’s savings

Assumes Sam pays in £4,000 in one year, receives the £1,000 bonus and earns no interest or growth. Real pots vary with returns and provider terms.

What the Budget published on 28 October 2026 changes

The Budget 2026 documents, published on 28 October 2026, set out two changes.

A lower charge for buyers above the cap. From 29 October 2026, the government says first-time buyers using Lifetime ISA funds towards a property above the £450,000 cap will pay a reduced withdrawal charge of 20% instead of 25%. The government says this protects the value of individual contributions, as the example above shows. The charge for other unauthorised withdrawals stays at 25%. The change is being made by secondary legislation laid before Parliament on 28 October 2026.

A replacement product from April 2029. At the Budget on 26 November 2025, the government said it would consult on a new product for first-time buyers only, and that consultation closed on 18 August 2026. LISAs can still be opened until the new product is available. The government has now confirmed a new First Time Buyer ISA from 6 April 2029, replacing the Lifetime ISA for new savers. It will allow contributions of up to £4,000 a year with a 25% bonus, paid on the account balance when money is withdrawn for a qualifying first home up to £450,000, with no upper age limit and no withdrawal charge. Existing Lifetime ISA holders will be able to keep contributing to and using their accounts under the current rules. Some details still depend on legislation the government plans to introduce before launch.

Worth knowing

The current GOV.UK Lifetime ISA guidance pages may take time to reflect the 20% charge. If you are buying above the cap, ask your provider and conveyancer how the charge will be applied to your withdrawal.

Who this matters for, and what to check

• People in their 40s with a Lifetime ISA opened before 40. Bonuses continue until 50, and the money is then meant to stay put until 60, so check how it is invested for that timescale.
• Parents and grandparents helping someone aged 18 to 39 with a deposit. The account must be in the young person’s name, and the property cap and 12-month wait apply.
• Buyers in higher-priced areas, where homes can exceed £450,000. From 29 October 2026 the charge in that case is 20%, which returns your contributions but loses the bonus.
• Anyone tempted to dip into a LISA for an emergency. The 25% charge means getting back less than you paid in, so an easy-access account may suit short-term needs better. Our guide to the £5,000 starting rate for savings covers how interest on that kind of money is taxed for people on low earnings.

Where that leaves savers

The Lifetime ISA still adds 25% on up to £4,000 a year for people who open one between 18 and 39, and that bonus is kept in full for a first home up to £450,000 or from age 60. The cost of changing plans is the 25% charge, now 20% for first-time buyers above the price cap. New savers will move to the First Time Buyer ISA from April 2029, while existing accounts carry on under today’s rules.