Landlord’s guide to government deposit schemes
It’s common practice for landlords to take a deposit when a tenant moves into a property, to protect themselves against damage caused or unpaid rent. Deposits legally must be placed into a government-backed Tenancy Deposit Protection (TDP) scheme, introduced by the Housing Act 2004.
In this guide, we’ll explain everything you need to know about tenant deposits.
- What is a tenancy deposit?
- How much deposit should a landlord take?
- What is a tenancy deposit scheme?
- Serving prescribed information
- Who does the scheme apply to?
- What happens if a deposit isn’t protected?
- How much is a deposit scheme?
- Which scheme should I choose?
What is a tenancy deposit?
Most landlords request a deposit from tenants to cover unforeseen costs like damage to the property or rent arrears (the latter of which can also be protected by rent guarantee insurance).
The landlord is legally entitled to use the deposit to repair such damage and claim unpaid rent. Landlords cannot use the deposit to pay for damages caused by wear and tear.
Do landlords have to take a deposit from tenants?
No, but why wouldn’t you? There’s no legal requirement to take a deposit, but not doing so leaves a landlord open to potentially having to pay for any damage themselves.
How much deposit should I take from my tenant(s)?
There are rules governing how much deposit landlords can take from tenants, brought in under the Tenants Fees Act 2019.
Since June 1st 2019, landlords in England can charge a maximum deposit according to the following:
- No more than five weeks’ rent where the annual rent is less than £50,000.
- No more than six weeks where the rent is £50,000 or more per year.
Prepare a property inventory
A property inventory is a comprehensive list of all the fixtures, fittings and contents in your rental property, and is often a requirement of entering a deposit scheme. Without a record, signed by landlord and tenant, of the condition of the property at the start of the tenancy, it can be difficult to prove something has been damaged.
Timed and dated photographic evidence forms an important part of the inventory as this makes it easier to determine when and what damage occurred.
Read our complete guide to creating a property inventory.
Regular property inspections can help identify issues before the need to use the damage deposit.
What is a Tenancy Deposit Scheme?
A tenancy deposit scheme is a government-backed safeguard for deposits taken under an assured shorthold tenancy in England and Wales.
Landlords must place the deposit in one of three schemes: the Deposit Protection Service, MyDeposits, or the Tenancy Deposit Scheme.
When was the Tenancy Deposit Scheme introduced and why?
The Tenancy Deposit Scheme was introduced by the Housing Act 2004 to ensure that tenants’ deposits were fairly handled by landlords and protected by government backing.
It ensures that if the tenant meets the terms of the tenancy agreement, the entire amount is returned.
Similarly, it allows the landlord to use the deposit – where appropriate – to cover the cost of any damages to their property caused by the tenant, or any unpaid rent.
There is also a dispute resolution service to ensure a solution is reached quickly.
How does the scheme work?
There are two types of scheme, either custodial or insurance-based. A government custodial tenancy deposit scheme requires a landlord to pay a deposit to a scheme administrator who holds the deposit until the tenancy ends.
An insurance-based scheme is where the landlord retains possession of the deposit, but secures it by paying a fee and insurance premiums to the scheme administrator.
Landlord: Serving Prescribed Information
The tenant’s deposit must be protected within 30 days of receipt by the landlord, and certain ‘prescribed information’ must also be provided to the tenant within the same timeframe.
As required by the Housing Act 2004, this information includes:
- Full details of the scheme used to protect the deposit, and how it works.
- The procedures in the event of a dispute.
- The amount of deposit paid.
- Address of the tenanted property, and name and address of the landlord.
- Any circumstances when all or part of the deposit may be retained by the landlord.
- How to apply to get the deposit back.
What if the tenant is paying the deposit in instalments?
Tenants may ask to pay the deposit in instalments but landlords do not have to accept this arrangement. If tenants request to pay the deposit in this way, it may be an indication that they are having financial difficulties.
If the landlord is happy to allow it, they must still comply with the law and secure the part of the deposit they have received within 30 days.
All three of the deposit schemes will allow you to do so, either by:
- Protecting the full deposit yourself and recouping the money from the tenant as they pay their instalments.
- Paying any admin charges to the deposit scheme to amend the amount of the deposit protected as you receive it. You should serve new paperwork to the tenant each time you do this.
Who does the deposit scheme apply to?
The government deposit scheme applies to all homes rented on an assured shorthold tenancy (AST).
Initially, only landlords who took a deposit after April 2007 needed to secure it in a protection scheme, but since the Deregulation Act of 2015, all deposits taken under an AST must be protected.
What are landlords legally obligated to do with a tenant’s deposit?
Where a deposit has been taken under an AST, landlords must take the following steps:
- Secure the deposit within 30 days in a government-backed deposit scheme.
- Serve the Prescribed Information, providing the tenant with the details within 30 days.
- Take responsibility, even if you’ve left the job to a letting agent, it is the landlord’s duty to ensure the above steps are taken.
What happens if the deposit isn’t protected?
There are legal consequences of failing to protect a deposit according to the law. Tenants can check with the three Tenancy Deposit Schemes to see if their deposit has been protected.
There are three main consequences to failing to comply:
- The tenant can make an application to the county court, which can either order the deposit to be repaid or paid into an authorised scheme (if the tenancy is ongoing). The court can order “statutory compensation” be paid of up to three times the deposit amount within 14 days, plus the deposit itself.
- Landlords cannot serve a valid Section 21 notice to evict a tenant if the deposit is not protected, unless it has been returned to the tenant (with any agreed deductions).
- If there are rent arrears, tenants can ask a court to offset their penalty award against the value owed.
If you have forgotten to protect the deposit, it’s best to do so as soon as you can, even though you will still be in breach of the 30-day legislated limit.
How much is the tenancy deposit scheme?
All three of the government-backed deposit schemes offer free custodial services, where the scheme holds the deposit for the landlord. There is a small fee payable for the insurance schemes, roughly between £10 and £25 depending on the size of the deposit to be insured.
What Deposit Protection Service shall I choose?
The following schemes apply in England and Wales only, there are separate schemes for Scotland and Northern Ireland.
Deposit Protection Service
The Deposit Protection Service (DPS) is the largest scheme in the UK, looking after nearly 7 million tenant deposits since it started in 2007.Landlords can register for a DPS account and choose between custodial or insurance.
Once you’ve created an account, simply add the details of the tenancy, pay in the deposit, and the DPS will then prepare the prescribed information for you to pass to the tenant. There is no fee to pay, and you get access to free training and free dispute resolution.
Insurance based deposit scheme
The DPS insured scheme allows landlords to keep hold of the deposit and pay a small premium per deposit. It’s usually used by letting agents and corporate landlords who look after multiple properties. The fee per deposit for letting agents is £9.50, increasing for landlords to £15 per deposit under £500, and £22.20 for deposits over £500.
The free dispute resolution service allows landlords and tenants to submit evidence, which is sent to an independent adjudicator who reaches a binding decision within 28 days.
My Deposits is endorsed by the National Residential Landlords Association (NRLA), which offers members discounted fees.
There is also a dedicated business development team for corporate landlords with large portfolios. Founded in 2007, it protects more than 1.1m deposits and has more than 150,000 members.
Three schemes are offered: custodial, insured and replacement.
The custodial scheme operates in the same way as the DPS scheme. The insured scheme costs £20 for deposits up to £500 and £27.20 for anything over £500 (the NRLA discount reduces these to £13.20 and £17.95). Deposit replacement gives tenants the option to pay a monthly subscription over the course of tenancy, instead of paying a deposit.
This provides the landlord with a guarantee of up to five week’s rent protection.
Tenancy Deposit Scheme
The Tenancy Deposit Scheme (TDS) was set up in 2003 as a non-profit organisation. It’s backed by the NRLA, ARLA Propertymark, and the Royal Institute of Chartered Surveyors (RICS).
The TDS deposit scheme offers a standard custodial scheme, and an insured scheme which costs £17.50 for deposits up to £500 and £24 for higher amounts (reduced to £13.20 and £17.95 for NRLA members). Under the insured scheme, landlords can protect a maximum of £25,000 in deposits at any one time.
TDS runs a free dispute resolution service, provides free templates, guides, and case studies, plus training courses and workshops.
If you’d like more information about the role of a landlord, as well as the different types of insurance you’ll need, visit our landlord hub.