Tenancy Deposit Schemes, your obligations and best practice

As a landlord, tenancy deposit schemes are something you should be aware of. We have given you an outline of what your responsibilities.

If you’re a landlord in England or Wales, understanding tenancy deposit schemes is essential. Since April 2007, legislation has required that any deposit taken from a tenant under an assured shorthold tenancy (AST) must be protected in a government-approved landlord deposit scheme within 30 days of the money being paid to you. Failure to comply with this can have serious financial and legal consequences, including fines of up to three times the deposit amount and restrictions on serving a Section 21 notice to regain possession of your property. This guide explains:

What a tenancy deposit scheme is
Why it’s a legal requirement
The three tenancy deposit schemes in the UK
Best practice for landlords to stay compliant

What is a Tenancy Deposit Scheme?

A tenancy deposit scheme (TDS) is a government-approved protection scheme that was introduced in April 2007 under the Housing Act 2004. This programme safeguards tenants’ deposits throughout their tenancy, and protects both landlord and tenant by:

Ensuring the deposit is secure and returned promptly at the end of the tenancy if there are no disputes.
Providing a free, independent dispute resolution service to handle disagreements fairly.
Guaranteeing that landlords can recover legitimate costs (e.g. unpaid rent, property damage).

Since 6th April 2007, tenancy deposit schemes in England and Wales have been required to be protected as part of the Housing Act 2004 and reinforced by the Localism Act 2011 and then later the Tenant Fees Act 2019. At the time, the government recognised that standards must be put in place in the letting industry which would protect tenants from unfair charges, ensuring that landlords could fairly cover the costs of any damage incurred by the tenant and provide a defined process for resolving any disputes.

Do Landlords Have to Put a Deposit in a Scheme?

Under the Housing Act 2004, any deposit taken for an AST must be registered in a rent deposit scheme within 30 days. Tenancy deposit schemes are a legal obligation and failure to comply carries the risk of fines and the potential invoking of the right to serve a Section 21 notice after the fixed term ends on a shorthold tenancy. If a deposit is not protected within 30 days in one of the three approved schemes (DPS, MyDeposits, or TDS), the tenant can take the landlord to court. Penalties include:

A fine of one to three times the deposit amount.
Being unable to issue a Section 21 notice until compliance is achieved (the deposit is protected, or penalty has been paid).

The private rented sector remains substantial as of 2023-24, and with more of the population renting than ever before (19.9% of households), the rental market provides an attractive investment. The figure increased by 19% in 2015/16 compared to the year before. Yet it was shown last year that landlords are risking their investments by not complying with basic legislation. A total of £514 million worth of deposits was believed not to have been placed in tenancy deposit protection schemes in England and Wales.

The 3 Tenancy Deposit Schemes in England and Wales

There are three government-backed schemes landlords choose from in England and Wales. These are The Deposit Protection Services (DPS), MyDeposits, or the Tenancy Deposit Scheme (TDS). Any deposits given to a private landlord or letting agent must by law be protected in one of the tenancy deposit schemes:

Deposit Protection Service (DPS): Offers both free custodial protection and an insured option for a fee.
MyDeposits: An insured scheme where the landlord or agent holds the deposit, or a custodial scheme where MyDeposits holds it.
Tenancy Deposit Scheme (TDS): Provides insured and custodial options and a dispute resolution service.

Although there is a small fee required from the landlord or agent to enter each deposit into an insured scheme, the potential financial repercussions for not complying are far greater. Half of all tenants aren’t notified at all about whether their deposit has been protected, which breeds a culture of distrust and reflects a lack of policing in ensuring compliance.

Which is the best tenancy deposit scheme for landlords?

There are two different types of tenancy deposit schemes you can choose from as a landlord, though the right scheme depends on your preference:

Custodial Deposit Scheme

This scheme protects the whole deposit during the entire period of the tenancy agreement and is returned to the tenant at the end of the tenancy.

The Insurance Deposit Schemes

This scheme allows the landlord to hold onto the deposit by paying a small fee to insure the deposit. This money cannot be used whatsoever during the entire tenant period, and like the custodial deposit, at the end of the tenancy must be returned to the tenant, dependent on deductions.

Both Landlords and Tenants Benefit

Protecting a deposit isn’t just a legal obligation; it protects both parties. It is the responsibility of landlords to protect all deposits by placing them into a tenancy deposit scheme within 30 days. This ensures that both parties are covered at the end of the tenancy. Landlords have the right to claim the expense of any damages or other monies owed, while tenants are protected from unfair deposit deductions.

Landlords can make legitimate claims for cleaning, damage, unpaid rent or missing items at the end of the tenancy.

Tenants have reassurance that their deposit can’t be unfairly withheld.

However, industry research shows that compliance is far from universal. Estimates suggest hundreds of thousands of deposits remain unprotected, with over £500 million at risk. This lack of transparency breeds distrust between landlords and tenants and exposes landlords to unnecessary legal risk.

Best Practice for Landlords

To ensure compliance with tenancy deposit protection legislation, follow these steps:

Protect the deposit within 30 days. Register it with DPS, MyDeposits or TDS.

Provide information in writing to your tenant confirming where the deposit is held, how it is protected, how it will be returned, along with full details of the protection scheme used.

Make sure it is clear in the tenant contract the terms which they must adhere to in order to have their deposit returned, and the circumstances which may result in any deductions.

Ensure that the tenant is fully informed on how they must apply for the return of their deposit, and how to proceed in the event of any dispute.

Keep accurate records and evidence. Photographs, check-in/check-out inventories, and correspondence help resolve disputes quickly.

Zero Deposit Schemes. Are They a Good Alternative?

Some landlords and agents offer a Zero Deposit Scheme, where tenants pay a non-refundable fee instead of a traditional deposit, or in other instances where no fees are needed although a high-quality application to reflect there is no deposit is required. While this can make a property more attractive to tenants, landlords must understand the pros and cons of this:

Pros: Faster move-ins, lower upfront cost for tenants, scheme lasts until the end of the tenancy.

Cons: May provide less security than a standard deposit scheme; check provider terms carefully.

How Long Does It Take to Get a Deposit Back?

At the end of the tenancy agreement, and once both parties agree on deductions (if any), the deposit is then usually returned within 10 working days. If there is a dispute regarding the deposit, the scheme’s Alternative Dispute Resolution (ADR) service provides a binding decision without having to go to court.

Landlords, Protect Your Investment with Chancellors

Failing to use a tenant deposit scheme could cost you thousands, damage your reputation, and limit your ability to regain possession of your property. Don’t worry though. At Chancellors, we help landlords:

Provide tenants with all required information regarding their deposit.

Stay compliant with tenancy deposit legislation.

Avoid costly disputes at the end of a tenancy.

Ready to let your property?

Take the first step by requesting a free, no-obligation property valuation today and ensure your rental property is fully compliant with UK deposit protection rules.

Correct at time of publication. The views and opinions expressed herein are those of the individual contributor and do not necessarily reflect those of the Chancellors Group of Estate Agents Ltd or its subsidiaries. References to legislation, best practice and other matters with legal implications such as fees, rules and processes are included for information and editorial purposes only and are not authoritative, nor should they be interpreted as advice. When in doubt you should only take advice from an industry professional or solicitor where appropriate. E&OE.