Lifetime ISA Changes: The New 20% Charge Above £450k and the First Time Buyer ISA

The 2026 Budget changed the Lifetime ISA in two ways. From 29 October 2026, buying a first home above £450,000 costs you a 20% charge instead of 25%, and the replacement First Time Buyer ISA now has a launch date: April 2029. Our earlier articles on how the Lifetime ISA works and whether first-time buyers should use one were written before these announcements, so this article sets out what’s changed.

What’s changed since our earlier articles

• Buying above the £450,000 price cap now costs a 20% withdrawal charge, not 25%. This applies from midnight on 29 October 2026.
• The replacement product is called the First Time Buyer ISA, and it starts in April 2029. Our earlier articles expected it “around April 2028”.
• The First Time Buyer ISA won’t have a withdrawal charge, but its property price cap stays at £450,000.

The basics of the current Lifetime ISA haven’t changed: you open one between 18 and 39, pay in up to £4,000 a year, get a 25% government bonus, and can use it penalty-free for a first home up to £450,000 or from age 60.

The new 20% charge, and why it matters

Under the old rules, buying a home above £450,000 counted as an unauthorised withdrawal, and the 25% charge left you with less than you’d paid in. Take the example from our earlier article: pay in £4,000, get a £1,000 bonus, and the account holds £5,000. A 25% charge is £1,250, so you get back £3,750 - £250 less than your own money.

At 20%, the charge on £5,000 is £1,000 - exactly the bonus. You get back your £4,000, plus any interest or growth on it. In effect, the government just takes back its bonus. The Treasury describes this as ensuring “the value of individual contributions is protected” when the property is above the cap.

Some important details:

• The 20% rate only applies to buying a first home above £450,000 that otherwise meets the Lifetime ISA rules - for example, using a mortgage and having held the account for at least 12 months.
• Withdrawing for any other reason still costs 25%.
• Buying a first home at £450,000 or less is still completely penalty-free, with the full bonus.

This matters most for buyers in London and the South East, where the average first-time buyer price is above the cap. If you’d been avoiding a Lifetime ISA because you might buy just above £450,000, the downside is now losing the bonus rather than losing some of your own money.

The First Time Buyer ISA, from April 2029

According to the Budget, the new product will:

• Allow contributions of up to £4,000 a year, as now.
• Add a 25% government bonus, paid on the account balance when you withdraw it to buy your first home.
• Cap the bonus at £20,000 in total.
• Apply to first homes worth up to £450,000.
• Have no upper age limit, unlike the Lifetime ISA, which you must open before 40.
• Have no withdrawal charge. Because the bonus is only paid when you buy, if you use the money for something else you simply don’t receive it.

It will replace the Lifetime ISA for new savers. Existing Lifetime ISA holders can keep contributing and using their accounts under the current rules.

What this means if you’re deciding now

• If you’re 18 to 39 and likely to buy a first home in the next few years, a Lifetime ISA is still worth opening. The First Time Buyer ISA is more than two years away, and waiting means missing up to £1,000 of bonus each year.
• If you might buy above £450,000, the case for a Lifetime ISA is better than it was. The worst case for a qualifying purchase above the cap is now losing the bonus, not part of your savings.
• If you’re 40 or over and haven’t got a Lifetime ISA, you can’t open one, but the First Time Buyer ISA’s lack of an age limit means you’ll be able to use the new product from April 2029.
• If you’re not sure you’ll buy a home at all, the 25% charge still applies to other withdrawals before 60. A Lifetime ISA is still best for money you’re confident will go towards a home or retirement.

If you’re planning to buy soon, the new Your First Home equity-loan scheme is also worth a look, and a Lifetime ISA can go towards your deposit.

The bottom line

The 2026 Budget fixed the Lifetime ISA’s harshest flaw for buyers caught out by the frozen £450,000 cap: buying above it now costs the bonus rather than your own money. The First Time Buyer ISA will be simpler and open to all ages, but it’s not arriving until April 2029. For most first-time buyers aged 18 to 39, the advice in our earlier articles stands - if a Lifetime ISA fits your plans, there’s no reason to wait.