Do You Earn Interest on a Lifetime ISA?

Cash Lifetime ISAs: interest rates explained

Each provider sets the rate on a Cash LISA. The rate can be variable or fixed. As at 2025/26, typical Cash LISA rates have been in the 3% to 5% AER range. These rates broadly track the Bank of England base rate. Interest is normally paid monthly or annually into the LISA, where it stays tax-free.

Savers with a shorter time horizon often use Cash LISAs, such as first-time buyers planning to buy within 1 to 5 years. The main draw is the 25% government bonus, not the interest. Even at 0% interest, paying in £4,000 produces £5,000 once the bonus is paid.

Each provider sets Cash LISA rates, and they move roughly with the Bank of England base rate. HMRC does not fix them, and they are not guaranteed. The one number HMRC fixes is the bonus: 25% on up to £4,000 of contributions per tax year. That is unchanged for 2026/27. It also helps to compare the rate with inflation. A headline rate below inflation still means the money buys slightly less than it did.

Stocks & Shares LISAs: investment growth instead of interest

A Stocks & Shares LISA holds investments, not cash. Returns come from three sources. The first is capital appreciation (the investments going up in value). The second is dividends paid by shares. The third is interest paid by any bonds in the underlying fund. None of this is ‘interest’ in the traditional sense. The value can fall as well as rise.

Long-run UK equity returns have averaged around 5% to 7% a year above inflation. Past performance is not a guide to future returns, and short-term losses are possible. Stocks & Shares LISAs are typically appropriate for longer holding periods (5+ years).

To HMRC, both types are the same account. The eligibility rules, the £4,000 cap, the 25% bonus and the withdrawal charge are identical for either type. They are covered in the Lifetime ISA explained. The only difference is what happens to the money once it is inside.

The government bonus: a 25% statutory return

The 25% government bonus is the headline LISA feature. It does not depend on interest or investment returns. It pays £0.25 for every £1 you contribute, up to £1,000 a year on the £4,000 contribution cap. Your provider claims the bonus from HMRC monthly. For more on timing, see when the government pays your LISA bonus.

Unlike interest, the bonus is set by law and does not move with the base rate or the market. As long as the LISA rules are met, the 25% is paid in full. The bonus cap follows the contribution cap: £4,000 a year, which means £1,000 of bonus a year. The LISA contribution limits guide covers this.

The bonus does not stretch your ISA allowance. It is paid on top of the £20,000 you can pay in yourself, and it does not use up any of that allowance. This is explained in does a Lifetime ISA count towards your ISA allowance.

Comparing LISA returns to a regular savings account

The simplest comparison is between a non-ISA savings account and a Cash LISA over a single tax year, with £4,000 contributed.

• Regular savings account at 5%: £4,000 + £200 interest = £4,200, taxable above the Personal Savings Allowance.
• Cash LISA at 4% + 25% bonus: £4,000 + £1,000 bonus + ~£160 interest = ~£5,160, all tax-free.

The bonus usually dominates the comparison, even at lower interest rates. The trade-off is the LISA’s 25% withdrawal charge. It applies if you take the money out for anything other than a first home, age 60, or terminal illness. Because the charge applies to the whole balance, not just the bonus, it can leave you with less than you paid in. The LISA withdrawal rules page works through the arithmetic.

Interest earned outside an ISA can be taxable once it passes the Personal Savings Allowance. Interest inside any ISA is not taxed and does not go on a tax return. For the wider picture on how savings and income are taxed, see income tax explained.

Tax-free growth: how compounding adds up

All interest, dividends, and capital gains inside a LISA are exempt from UK Income Tax and Capital Gains Tax. The saver has no annual reporting requirement. Over decades, compounding can make a large difference. As an illustration, £4,000 a year paid from age 18 to 50, at a 5% real return (an illustrative assumption, not a forecast), grows to roughly £520,000 by age 60 from contributions alone, or about £650,000 with the 25% bonus added. Actual returns will vary, and no tax is due on the growth.

Use the LISA calculator to model your own contributions, growth assumption, and time horizon.

The same exemption applies to every ISA type. Gains made inside the wrapper are outside Capital Gains Tax, and there is nothing to declare. Outside an ISA, the same gains would count against the annual CGT exempt amount, which is £3,000 for individuals in 2026/27. Tax at 18% or 24% applies to anything above it, depending on your income. That comparison is covered in do you pay CGT on shares in an ISA and in the wider guide to Capital Gains Tax.

When interest is paid into your LISA

Cash LISA interest payment frequency varies by provider:

• Monthly (most common for variable-rate Cash LISAs)
• Annually (more common for fixed-rate Cash LISAs)
• On withdrawal or maturity (rare; check the terms before opening)

Interest paid into the LISA stays inside the wrapper and keeps compounding tax-free.