Contractors alerted to Lifetime ISA penalty

A hefty 25% withdrawal charge is the unpalatable part for contractors of the now available Lifetime ISA, an independent worker body is warning.

Although it applies to most withdrawals (from April 5th 2018) and all LISA-holders, the charge is a particular blow to contractors because their incomes typically fluctuate, said IPSE.

So such people who work for themselves, with variable earnings, have more cause to want to access the £4,000 tax-free that a LISA can stash, but will be heavily penalised if they do.

In fact, only in three narrow conditions would extracting their money not incur contractors the 25% charge, the government stipulates, such as if they become terminally ill.

The Association of Independent Professionals the Self-Employed (IPSE) says the eligibility of LISAs is restrictive too, as they are only available to 18-39-year-olds.

But the penalty is IPSE’s main gripe. “Self-employed incomes are variable and people should be aware of the large 25 per cent penalty for removing finances.

“The self-employed have volatile, irregular incomes so a penalty-free withdrawal would alleviate the significant penalty if they do need to access their money,” the association said.

Designed to help the self-employed, specifically when buying a property or saving for retirement, a LISA can stash up to £4,000 a year tax-free, until the saver is 50.

The government adds in a 25% bonus (on the total amount paid in, so not interest and not investment growth) upon withdrawal of the cash, but only after the saver’s 60th birthday.

“[The LISA] is certainly a step in the right direction and the young self-employed, in particular, would be wise to take advantage…[but] it’s not for everybody,” said IPSE’s Lorence Nye.

“[That’s why we are] calling for removing or lowering the financial penalty to accommodate for self-employed variable income.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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