Step 1: Preheat your oven to 325°F (160°C). Grease and flour an 8x8-inch baking pan or line it with parchment paper for easy removal. Set aside.
Step 2: In a large bowl, cream together the softened unsalted butter and granulated sugar until light and fluffy, about 3-5 minutes with an electric mixer.
Step 3: Beat in the eggs one at a time, ensuring each is fully incorporated before adding the next. Scrape down the sides of the bowl as needed.
Step 4: In a separate bowl, whisk together the all-purpose flour, baking powder, and salt.
Step 5: Gradually add the dry ingredients to the wet ingredients, alternating with the milk, beginning and ending with the dry ingredients. Mix until just combined, being careful not to overmix.
Step 6: Gently stir in the fresh lemon juice and lemon zest until evenly distributed. The batter will be quite thin; this is normal.
Step 7: Pour the thin batter into your prepared baking pan. Place the baking pan into a larger roasting pan, and carefully pour hot water into the larger pan until it comes about halfway up the sides of the cake pan. This creates a water bath.
Step 8: Carefully transfer the roasting pan with the cake pan into the preheated oven. Bake for 50-60 minutes, or until the top is golden brown and a toothpick inserted into the cake portion (avoiding the custard) comes out clean. The cake should feel set around the edges but may still have a slight jiggle in the center (custard layer).
Step 9: Remove the cake from the oven and carefully lift the cake pan out of the water bath. Let it cool completely on a wire rack at room temperature. Once cool, transfer to the refrigerator for at least 2-3 hours (or overnight) to allow the custard layer to fully set.
Step 10: Before serving, dust generously with powdered sugar if desired. Slice and enjoy your magically layered lemon custard cake!