Lifetime ISA Withdrawal Charges: What Self-Employed Savers Should Know

Tax Queen

Tax Expert @ Pie

4 min read

What You Need to Know

If you take money out of a Lifetime ISA for anything other than buying your first home, reaching 60, or terminal illness, you pay a 25% charge on the full amount you withdraw. The charge doesn't change your Self Assessment, but it can wipe out your government bonus and a slice of your own savings.

The practical takeaway for the self-employed is simple. Don't treat a Lifetime ISA as your emergency fund or your tax bill pot, because getting money out early is expensive.

How the Lifetime ISA Charge Works

A Lifetime ISA (LISA) is a tax-free savings account you can open between the ages of 18 and 39. You can pay in up to £4,000 a year until you turn 50, and the government adds a 25% bonus, worth up to £1,000 a year.

You can take money out without a charge if you're buying your first home for £450,000 or less, at least 12 months after your first payment in. You can also withdraw freely once you're 60, or if you're terminally ill with 12 months or less to live.

Anything else counts as an "unauthorised withdrawal", which is HMRC's term for taking money out outside those rules. The 25% charge applies to the whole amount you take, bonus included, so you lose more than just the bonus.

Here's how that plays out. Pay in £4,000, receive a £1,000 bonus, then withdraw the full £5,000, and the charge is £1,250. You walk away with £3,750, which is £250 less than you put in yourself.

That £250 works out at 6.25% of your own money. We've covered the wider rules in our guide to Lifetime ISA penalties and how they work.

What the Latest HMRC Figures Show

Figures released by HMRC under a freedom of information request show around 45,000 savers were hit with withdrawal charges more than once in 2024-25. On average, each of them lost around £760 that year. [Editor Note: Unverified figure - check against HMRC guidance]

Most repeat payers sat in the lowest bracket, with around 33,530 savers paying up to £999 in charges. At the other end, around 60 savers paid £8,000 or more, and the 25 repeat payers with the biggest totals averaged around £11,000 each. [Editor Note: Unverified figure - check against HMRC guidance]

HMRC's published statistics for 2025-26 show the bigger picture. Some 154,100 people made unauthorised withdrawals that year, paying around £119 million in charges.

What This Means for Your Tax Return

Money in a Lifetime ISA grows tax-free. You don't report interest, dividends or growth from it on your Self Assessment, and withdrawals aren't treated as income.

The flip side is that the withdrawal charge isn't a tax, so there's no relief for it. You can't claim it as a business expense or offset it against your profits.

Savings held outside an ISA work differently. Interest counts towards your Personal Savings Allowance (the amount of interest you can earn tax-free), which is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Here's when you need to report bank interest on your tax return.

Why Self-Employed Savers Get Caught Out

Without an employer pension, many sole traders and freelancers use a Lifetime ISA as their retirement pot. The trouble is that self-employed income is rarely steady, so a quiet few months can make locked-away savings look very tempting.

The squeeze often comes around 31 January, when your balancing payment and first payment on account can land at the same time. A payment on account is an advance payment towards next year's tax bill, and it catches plenty of people out. Covering it from a Lifetime ISA means losing a quarter of whatever you withdraw.

Lifetime ISA or Pension?

Personal pension contributions work differently. Basic rate tax relief of 20% is added to what you pay in, and higher rate taxpayers can claim extra relief through their Self Assessment.

The Lifetime ISA bonus is a flat 25% whatever your tax band, but your contributions don't reduce your tax bill. If you're weighing them up, our guide to tax relief for the self-employed is a good starting point, and a regulated financial adviser can help with the decision itself.

What's Changing

The Treasury consulted on a new First Time Buyer ISA from 23 June 2026, with the consultation closing in August. Once it launches, it will be offered in place of the Lifetime ISA and will focus only on buying a first home.

Under the proposals, the bonus would be paid when you buy, not as you save. That would let you take your money out without a penalty if your plans change, although the final rules haven't been confirmed.

If you already have a Lifetime ISA, you can keep paying in under the current rules. You can still open one until the new product arrives, but the government has said you won't be able to move a Lifetime ISA into the new account.

What to Do Now

Set aside a share of every payment you receive for tax, in a separate account you won't touch. That way, the January bill never pushes you towards your Lifetime ISA.

Keeping your income and expenses up to date makes the bill easier to predict too. Try Pie Tax for free and see what you owe as you go.

Pie Tax is self-assessment software that handles Self Assessment and Making Tax Digital for sole traders, landlords, and freelancers, pulling in your income, sorting your allowable expenses, and calculating what you owe without the spreadsheet stress.