The Autumn Budget introduced a major revision to the widely criticised Lifetime ISA penalty, meaning savers will no longer lose money if the charge applies.
Thousands of individuals have faced large deductions after withdrawing cash outside the Lifetime ISA (LISA) rules.
During today's Budget, Chancellor John Healey said he was "taking action" to protect young aspiring homeowners from such hits.
The LISA is a savings vehicle designed to help people set aside funds for a first home or retirement.
Contributors can deposit up to £4,000 each tax year, with the Government adding a 25% bonus to those amounts.
Criticism has grown because the account only permits spending on properties priced up to £450,000.
Rising house prices, especially in London and the South East, have left many unable to buy homes within that cap.
Withdrawing money for any purpose other than a first-home purchase or retirement triggers a 25% penalty.
This charge not only removes the bonus but also effectively erodes 6.25% of the contributor's own money.
For example, a £4,000 annual contribution plus a 25% bonus yields £5,000; a non-home withdrawal would incur a £1,250 penalty, leaving £3,750, which is less than the original deposit.
Mr Healey stated in the Budget: "For every young person who's working hard, saving what they can and dreaming of their own first home, I am taking action..."
"From today, I am dealing with the LISA penalty, so if the home you want costs more than the limit, you will get back at least what you put in."
The penalty amount collected is transferred to HMRC, boosting its revenues.
Last year, HMRC reportedly received £119million from penalties imposed on LISA savers.
