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Chancellor told to “end Lifetime ISA penalties now” as HMRC slaps first-time buyers with £11,000 fines on withdrawals
3 October 2024
London, 3rd October 2024 – Chancellor Rachel Reeves is being urged to scrap Lifetime ISA penalties in The Budget as it emerged first-time buyers were charged penalties of more than £11,000 in some cases on withdrawals.
Smart money app Plum obtained data revealing the full scale of government penalties (1) – amid reports that Treasury officials are considering a reboot.
Under the current rules, LISA withdrawals are only authorised for retirement spending and first-time property purchases up to the value of £450,000.
The government imposes a 25% penalty on the total value of the savings pot at its closure for withdrawals outside these criteria – stripping out not just the 25% government bonus but also a chunk of the interest or investment growth too.
While there are multiple reasons savers can be penalised, the current £450,000 cap has attracted the most widespread criticism from LISA providers and first-time buyers.
Rajan Lakhani of smart money app Plum which launches a LISA very soon, commented: “These findings show how the current ceiling is shutting people out of the housing market. There are currently dozens of local authorities across the country where the average house price is greater than the £450,000 cap, and that number is only set to rise in the future.
“The Chancellor has put home ownership at the centre of the Labour party’s programme for government. That’s why it makes sense to index-link the Lifetime ISA ceiling from the time of its launch and bring in a new limit closer to £600,000.
“Young people trying to get a foot on the housing ladder have enough challenges already without having to worry about potentially losing a chunk of their hard-earned savings.”
Data released to Plum by HMRC under Freedom of Information (FOI) rules has revealed that around 74,000 savers were hit with penalties in 2022-23, including 15,977 who were forced to hand back £1,000 or more. Some 6,139 savers were hit with penalties of £2,000+ while 851 potential homebuyers were fined £5,000+.
The top 25 penalties imposed by HMRC averaged an eye-watering £11,000 each – a huge chunk of a first-time buyer’s deposit.
While buyers in London, where average property prices stand at £536,052, are particularly exposed to the LISA cap, there are currently around 28 local authorities outside the capital with averages above the £450,000 ceiling. These include Brentwood, Essex (£467,357), Sevenoaks, Kent (£500,569) and St Albans, Hertfordshire (£584,360).
If the purchase limit had been index-linked in 2017 when LISAs were first launched, the cap would now stand at roughly £583,000.
Rajan Lakhani of Plum commented: “The Lifetime ISA is a powerful weapon for first-time buyers looking to build a deposit, but there is a growing consensus that some of the rules introduced in 2017 are starting to look a little outmoded.
“The upcoming budget offers Rachel Reeves the perfect opportunity to fine-tune the current LISA rules so young families can realise the dream of home ownership sooner.
“Even losing a sum of £1,000-£2,000 can be a major set-back for a young couple shopping for their first home. It represents the cost of a home survey, or your removal fees.
“Buying a first home is a huge decision, and the market has moved significantly since 2017. House prices have risen – but policy has not caught up.
“Moreover, the high financial pressure of renting has made it difficult for people to save for their first homes, with first time buyers increasingly well into their thirties and more likely to need family homes rather than classic starter flats. In many parts of the country, this is simply unachievable for £450,000.
“By raising the property price limit to a more equitable £600,000, Rachel Reeves can empower first-time buyers to buy the properties they actually need without fear of being penalised.”
Smart money app Plum expects to launch a Lifetime ISA very soon. Its current product portfolio includes a cash ISA alongside an attractive range of funds, pension and savings products.
-ENDS-
Notes to editor:
Free money
Lifetime ISAs (or LISAs) were launched to help people get a foot on the housing ladder or help them save for later life.
To sweeten the deal, the UK Government offers 25% tax relief on the money you save thanks to an income tax reimbursement from HMRC.
A Lifetime ISA saver can invest up to £4,000 every tax year, meaning there's the potential to earn a maximum bonus of £1,000 annually up until the age of 50.
Lifetime ISAs: know the rules
The Lifetime ISA is a form of tax-free savings account designed to help people looking to do one of two things: save for their first home or save for later life.
If you want to take money out before you're 60 and you aren't buying your first home, there's usually a 25% government charge. That not only takes away the government bonus, but a portion of your own hard-earned savings too, meaning you could get back less than you put in.
As a couple, if both are first-time buyers, they can both use their LISA money to fund a join purchase.
A LISA account must be open for at least 12 months before a saver can withdraw and claim their bonus.
Perhaps most controversially of all, LISAs cannot be used to buy a home worth £450,000 or more.
There are no penalties for those withdrawing money over the age of 60, making them a potential retirement saving option.
Interest free gains
A key feature of ISAs is that interest earned is exempt from taxation. Currently, basic rate taxpayers can earn just £1,000 interest before being taxed, and higher rate just £500.
Elevated interest rates mean more and more people face unexpected tax bills. The government expects 1.4 million basic rate taxpayers to pay tax on their savings interest in the current tax year, as well as 842,000 higher rate taxpayers and 452,000 additional rate taxpayers.
Assuming interest rates of 5%, a higher-rate taxpayer would need only £10,000 savings to hit their limit, while a basic rate payer would need £20,000.
LISA savers pay no tax on interest savings regardless of their income.
About Plum:
Plum is the ultimate smart money app, helping two million people to invest, save and manage their spending with automation. Founded in 2016 by Victor Trokoudes (ex-Wise), Plum automates parts of personal finance that people find difficult or don’t have time for, with effortless saving, empowered spending and accessible investing. Plum was named Best Personal Finance App at the British Bank Awards 2023 and was named one of the fastest-growing companies in the UK by the Deloitte Technology Fast 50 2023. Plum is headquartered in London, UK, and has offices in Athens, Greece and Nicosia, Cyprus.
Disclosures:
Plum is not a bank. The interest you earn in a Lifetime ISA will be tax-free so long as your account is managed in line with the Government’s rules. The tax treatment of ISAs and the applicable Government rules are subject to change. The benefits of your account for tax purposes will depend on your personal financial circumstances.
You may get back less than you paid into your Lifetime ISA as a 25% government penalty applies if you withdraw money for any reason other than buying your first home or retirement. Rates may change. If you sign-up for the Lifetime ISA, you have the right to cancel it fully within 30-days. T&Cs apply.