Deposit Protection Schemes: A Complete Guide to Tenancy Deposits 2021

By Natalie Deakin

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Deposit Protection Schemes – What Landlords and Tenants Should Know About Tenancy Deposits in 2021

This post was last updated on August 13th, 2021 at 11:48 am

Deposit protection schemes are a tricky topic for landlords and tenants. Since the Tenant Fee Ban, the legalities of tenancy deposits have caused confusion. Where should they be kept? How much should they be? What costs can be deducted?

If you’re struggling with the ins-and-outs of deposit protection schemes, don’t worry – you’re not alone. 60% of landlords said that they find deposit disputes difficult (UK Landlord Survey 2021).

In this article, you can learn everything you need to know about tenancy deposits and deposit protection schemes.

What is a tenancy deposit?

A tenancy deposit, or security deposit, is a sum of money paid by a tenant before they move into a rental property. A deposit (no more than five weeks’ rent) is typically paid with the first month’s rent, after the tenancy agreement is signed and before the tenant moves in.

In England, Scotland and Wales, deposits must be registered with a deposit protection scheme. The funds are protected by the scheme throughout the tenancy and returned when the tenant leaves. If there are costs incurred by the tenant, such as property damage or rent arrears, the deposit can be used to cover these costs.

Read more: Lettings Definitions And Renting Jargon: 2021 Landlord And Tenant Guide

How much is a tenancy deposit?

A tenancy deposit in England and Wales can be no more than five weeks’ rent for properties with an annual rent below £50,000. For annual rents above £50,000, deposits are capped at six weeks. This limit was introduced as part of the Tenant Fee Ban 2019, to protect tenants from incurring unnecessary renting costs.

In Scotland, deposits are limited to two months’ rent.

Deposit protection schemes: does a landlord have to take a deposit?

No, a landlord is not obligated to request a deposit from their tenant, although it is recommended. If things go wrong, a deposit can cover the costs of damage repair or unpaid rent. Landlords letting with an agent or external property company will likely be required to request a deposit.

What is the difference between a tenancy deposit and a holding deposit?

A holding deposit and tenancy deposit are different. A holding deposit is equivalent to one week’s rent and is paid by the tenant when they apply to rent a property. A tenancy deposit is equivalent to five weeks’ rent and is returned to the tenant at the end of the tenancy.

The purpose of the holding deposit is to secure the property for the tenant and essentially ‘reserve’ it to rent. Tenants should receive their holding deposit back as a deduction from their first month’s rent.

A tenancy or security deposit is protected with a deposit protection scheme and is not returned to the tenant until the tenancy ends. If a tenant does not meet the terms of the tenancy agreement, damages the property, or doesn’t pay their rent or bills, the landlord can deduct costs from the deposit to cover this.

How do I calculate my deposit amount?

To calculate your correct deposit amount, you must first figure out one week’s rent. It’s a common mistake to do this by simply dividing your monthly rent by four. As some months are longer than four weeks, this isn’t accurate. One week’s rent can be calculated as follows:

(monthly rent amount x 12) ÷ 52 = one week’s rent

Multiplying this figure by five will give your deposit limit. Here’s an example with a monthly rent of £500:

£500 x 12 = £6,000

£6,000 ÷ 52 = £113.30

£113.30 x 5 = £566.50

If your deposit amount is a long decimal number, it’s best practice to round the number down, not up, to ensure you don’t exceed the legal cap.

When is a tenancy deposit paid?

Deposits are typically paid after the landlord and tenant sign the tenancy agreement and before the tenant moves in. Once a landlord or letting agent receives the security deposit funds, they have 30 days to register it with a government-backed tenancy deposit scheme.

Deposit registration and dispute resolution are included in all our letting plans (from £39 a month).

Are tenancy deposits legal under the Tenant Fee Ban?

Tenancy and holding deposits are amongst the few fees that tenants can still pay. The Tenant Fee Ban, introduced in 2019, reduced tenant costs and capped deposit amounts. Reference checks, renewal fees and other administration costs cannot be charged to tenants.

Deposits are completely legal, as long as they are within the specified limit. Tenants can also be charged for late rent payments, ending a tenancy early, lost keys or changing or transferring their tenancy.

Why do I have to pay a deposit? 

A tenancy deposit acts as a protective insurance for landlords. If a tenant leaves the property in the condition it was let – with no damage, no missing items and no outstanding rent – the tenant can receive their full deposit back. The landlord has no costs to pay and everyone’s happy.

If, however, a tenant damages the property, leaves it in a seriously unclean state, has broken furniture or removed property supplied by the landlord, the deposit can be used to cover these costs. Similarly, if the tenant has built up rent arrears, the landlord has the deposit to fall back on.

If a landlord wants to claim on a deposit, they must tell the tenant first. If the tenant does not agree, a dispute can be raised with the deposit protection scheme. They will look at all the evidence and an adjudicator will come to a resolution.

Related article: “I Was Faced With An Abusive Tenant and High Rent Arrears”

Deposit protection schemes: Where can I register a deposit?

Landlords in England, Scotland and Wales must register their tenancy deposit with a government-approved deposit protection scheme. In England, these are:

In Scotland, these are:

Tenancy deposits must be registered within 30 working days of receiving funds from the tenant. The tenant must be told where their deposit is being stored, otherwise known as prescribed information.

What are the deposit protection scheme rules in Wales?

The deposit protection rules are the same in Wales as they are in England. Tenancy deposits can be no more than five week’s rent (six week’s rent for annual rents above £50,000). The deposit must be stored with a government-approved deposit protection scheme and tenants must be given the relevant prescribed information.

What are the deposit protection scheme rules in Scotland?

Deposits are similar in Scotland. They must be registered with an authorised deposit protection scheme within 30 working days, but the cap is two months’ rent, not five weeks.

Scotland has different registered deposit protection schemes to England and Wales, but they work the same way. These are Letting Protection Service ScotlandSafe Deposits Scotland and my|deposits Scotland.

How long do I have to register my tenant’s deposit with a deposit protection scheme?

A deposit must be registered with a deposit protection scheme within 30 working days of the funds being received. The deposit must be protected for the entire duration of the tenancy.

What is a deposit protection scheme?

Deposits on properties let on an assured shorthold tenancy (AST) that started after 6 April 2007 must be registered with a government-approved deposit protection scheme.

A tenancy deposit protection scheme protects a deposit during the tenancy. If there is a dispute, the tenancy deposit scheme will seek to resolve it in an impartial manner.

Which deposit protection scheme should I use?

Landlords should always use a government-approved deposit protection scheme. Beware of fake schemes that are not authorised by the government.

There are two types of deposit protection schemes: custodial or insured. A custodial scheme holds the deposit for free. An insured deposit scheme involves the landlord or agent ‘holding’ the deposit in their own bank account and the scheme is paid to ‘insure’ it.

Choosing between a custodial and insured scheme is entirely down to the landlord’s preference. The Deposit Protection Service (DPS) and Tenancy Deposit Scheme (TDS) offer custodial schemes in England and Wales. All tenancy deposit schemes in Scotland are custodial scheme and free to use.

Some landlords prefer a custodial scheme because there is no upfront cost and it is easy to use. Others pay for an insured scheme as they can keep the funds in their bank account, along with any interest accrued.

What happens if I don’t use a deposit protection scheme?

Registering a tenant’s deposit is a legal requirement. Any landlord that doesn’t protect their tenant’s deposit could be fined up to three months rent and may not be able to issue a correct Section 21 notice.

All deposits with LettingaProperty.com are registered with a deposit protection scheme.

What is tenancy deposit prescribed information?

Once registered, landlords must provide tenants with prescribed information within 30 working days. This is simply written information on where the deposit is being kept, including:

  • The deposit amount
  • The property address
  • The name, address and contact details of the tenancy deposit scheme
  • The name, address and contact details of the landlord, tenants and any third parties who have contributed to the deposit

On a custodial deposit protection scheme, the Custodial Terms and Conditions must also be included in the prescribed information.

Can a landlord keep a tenant’s deposit in their bank account?

A tenancy deposit can be kept in a landlord’s bank account, but it must be registered with an insured tenancy deposit protection scheme. Some landlords opt for an insured scheme as it allows them to build interest on the deposit amount – but it does require an upfront premium.

On a custodial scheme, the deposit amount must be kept with the scheme, not the landlord or letting agent. A landlord cannot choose to keep the deposit without a scheme: all deposits must be registered with a government-approved deposit protection scheme.

Do all landlords need to use a deposit protection scheme?

All deposits taken on assured shorthold tenancies in England and Wales, started after 6 April 2007, must be kept in a deposit protection scheme. The same applies to private residential tenancies in Scotland.

When do tenants get their deposit back? 

Tenants can’t request their deposit back until the tenancy ends. Once any deposit deductions have been discussed and agreed upon (if any) the deposit must be returned to the tenant within ten days.

If the landlord holds the deposit (on an insured scheme) they should pay the deposit back within ten days of the tenant requesting it back, if not sooner. Landlords do not have to wait for tenants to request their deposit in order to return it to them.

If the deposit is stored with a custodial scheme (where the scheme holds it, not the landlord) the tenant can request the deposit directly from the scheme. Details of the scheme should be given to the tenants when the deposit was initially registered (under prescribed information). The custodial scheme will contact the landlord or letting agent to agree to the deposit return request.

What costs can be deducted from tenancy deposits?

Sometimes a landlord may want to deduct funds from a tenancy deposit before returning it. This usually happens if the tenant has caused damage to the property, not left it in a clean or fit state, or hasn’t paid their rent. Common deposit deductions include:

  • Damage to the property itself
  • Indirect damage due to the tenant’s negligence
  • Damaged or missing contents (e.g. furniture supplied by the landlord)
  • Returning the property in an unclean state (worse than it was originally let)
  • Leaving unwanted belongings at the end of the tenancy (without discussing with the landlord)
  • Outstanding rent
  • Unpaid bills

Landlords are legally required to keep a property in good working condition throughout a tenancy. Costs cannot be deducted for all maintenance and repairs. General maintenance of the property structure (e.g. walls, roofs, drain pipes) and key facilities (e.g. heating, electric wiring, sinks and toilets) are the landlord’s responsibility and cannot be deducted from a deposit. However, tenants do have a responsibility to treat the property in a ‘tenant-like manner’. This means taking care of the property and reporting any issues to the landlord before they get worse.

Read more: Landlord Repair Obligations – What Are Your Tenancy Responsibilities?

Can a tenancy deposit be used for unpaid rent?

If a tenant leaves a property with outstanding rent, the deposit funds can be used to cover the owed amount. If the rent arrears are more than the deposit amount, the landlord can take the tenant to court to get their money back.

Court proceedings can take a very long time and landlords often go months without any rental income. Rent Protection ensures landlords always receive their monthly rent amount – even if the tenant falls short, pays late or doesn’t pay at all.

Rent Protection is included in our Essential and Complete plans (starting from £59 per month).

What happens if I have a tenancy deposit dispute?

If a landlord wants to deduct costs from a deposit, they must let the tenant know first. it’s best practice to give tenants written confirmation of what costs will be deducted and why. This allows the landlord and tenant to discuss the issues and come to an amicable resolution. If the landlord and tenant cannot agree on the deductions, they may need to use a dispute service. 

All deposit protection schemes offer a free deposit resolution service. This involves an adjudicator looking at the evidence provided by both parties, such as photos and videos of the property, communications, and inventory and check-out reports. The decision made by the scheme is final, but landlords or tenants may choose to take the issue to court if they are unhappy with the outcome.

Deposit disputes are why inventoriesmid-term inspections and check-outs are so important. Without an official record of the property’s condition, it’s unlikely that a deposit scheme will decide in the landlord’s favour. A professional inventory and schedule of condition are absolutely essential for any damage-related dispute.

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About Natalie Deakin

Natalie joined LettingaProperty.com in 2014. As the team has grown, she's developed her knowledge and experience, progressing to become Operations Manager. Overseeing every online transaction, from property advertising and tenant referencing to deposit disputes, rent arrears, and renewals – Natalie's team helps our landlords to stay legal and compliant.

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