Five key reasons why landlords should take a tenancy deposit

Click to read Five key reasons why landlords should take a tenancy deposits

Tenancy deposits are a standard part of renting in the UK, and for good reason. In this guide, we explore why deposits remain an essential safeguard for landlords. With deposit alternatives on the rise and new legislation on the horizon, we break down the purpose of deposits, the risks of going without, and how to stay compliant.

Five key reasons why landlords should take a tenancy deposit

A tenancy deposit (sometimes called a security deposit) is  money that the landlord or agent can request from the tenant before they move into a property. It offers landlords protection against:

• unpaid rent or bills
• property damage
• missing items listed in the inventory

If you’re letting a property under an assured shorthold tenancy (AST) or Welsh occupation contract, and you take a deposit, you’re legally required to protect it with a government-approved scheme like mydeposits for the length of the tenancy.

Tenancy deposit protection legislation was included in the Housing Act 2004. It became compulsory for deposits taken in relation to an assured shorthold tenancy after 6 April 2007 to be protected with a government-approved tenancy deposit (TDP) scheme.

You also need to serve the correct prescribed information to the tenant within 30 days of receiving the money. At the end of the tenancy the money should be refunded to the tenant after they have left, minus any reasonable proposed settlements made by the landlord relating to unpaid rent or damage. If a landlord wishes to propose a settlement from the deposit when the tenancy ends, they must be able to prove, with evidence, that the claim is reasonable.

While most tenants look after their rental homes responsibly, deposit protection helps to resolve issues on the rare occasions when something goes wrong.

Suzy Hershman, Resolution Department Lead at mydeposits, explains:
“While some landlords choose not to take  a deposit, which is fine, it is a legal requirement to protect it if you do, and protecting it must be done properly. By not following the proper procedure or not protecting it at all, you risk more than just lost income. You may face legal action, lose the right to evict your tenant using Section 21 and have to repay the deposit and up to three times the amount as compensation.”

What is the maximum deposit amount?

Under the Tenant Fees Act there is a cap on the deposit amount that can be taken depending on the annual rent:

• No more than five weeks’ rent where the total annual rent is less than £50,000
• No more than six weeks’ rent where the total annual rent is £50,000 or more

Tip: To calculate a week’s rent, multiply the monthly rent by 12 and divide by 52.

The alternatives to a traditional deposit

While traditional deposits remain the norm, some landlords choose to forgo them entirely or opt for deposit alternatives instead. These approaches can offer certain benefits, but be aware they also come with trade-offs.

In this section, we explore the pros, cons, and potential risks of going deposit-free or using an alternative ‘replacement’ scheme, to help you decide what’s right for you and your rental property.

1. Taking no deposit at all

This can feel like a way to speed up the letting process. It may reduce the admin and appeal to tenants without savings, which then allows you to let the property more quickly and appeal to a wider range of tenants. In addition, there is no risk of your tenant taking you to court or of not being able to evict them using a Section 21 notice due to poor deposit administration. But the risks include:

• no financial cushion for damage, cleaning or unpaid rent/ bills
• no access to free resolution
• potential for increased financial losses if the tenancy ends badly

This may suit certain landlords or properties, but you may be trading speed for security.

2. Using a deposit replacement scheme

Deposit alternatives include insurance-based or fee-based schemes that aim to offer protection without requiring an upfront lump sum from the tenant. While they can offer flexibility and more protection than simply not taking a deposit at all, not all schemes are created equal.

Things to consider:

• Is the scheme regulated and transparent about costs?
• What level of cover does it offer?
• Will it allow you to make a claim easily?
• What administration is required?

If you’re using one of these schemes, do your due diligence, always carry out robust referencing checks, and make sure your tenants understand what they’re signing up to.

Despite the rise of deposit replacement schemes and the extra admin involved, most landlords continue to take a traditional deposit. As of April 2024, over 4.6 million deposits were protected in England and Wales alone.

Traditional deposit v alternative schemes – the facts:

Total Property’s 2024 survey revealed that 96.4% of tenants use a traditional deposit, with only 2.4% opting for a deposit alternative. And this is despite 30% of tenants reporting that raising the money for a deposit is one of the biggest challenges they face today. This suggests that there is a lack of awareness about the options, concern about potential hidden costs, or a perception that they might be less secure than traditional deposits, and the fact that not all landlords readily offer them. After more than 17 years in operation, the tenancy deposit system remains a reliable way to safeguard both a landlord’s finances and their property, with only 15.6% of landlords and agents reporting that they have ever used a deposit replacement.

The top five reasons why landlords should take a deposit

Although there is no legal requirement to take a deposit, the benefits of taking a deposit are widely accepted. Here’s why most landlords continue to take a tenancy deposit.

1. It provides a financial safety net

Deposits give landlords some protection if there is damage to the property at the end of the tenancy. Without a deposit, landlords may have to cover these costs out of their own pocket. It should however be emphasised that taking a deposit is not a substitute for having comprehensive landlord insurance.

2. It covers more than just damage

The main purpose of protecting a deposit is to cover end-of-tenancy costs like cleaning, repairs or damage. If needed, it can also be used to recover unpaid rent, bills, arrears or removal of abandoned items. This reinforces the importance of keeping the deposit fully protected until the tenancy ends and not using any portion during the tenancy.

3. It encourages tenants to look after the property

Nearly all tenants who pay a deposit are looking for a full refund when they move out so having something to lose incentivises them to look after  their rental home. It also signals that the tenant is financially stable and ready to meet their responsibilities. A happy tenant will feel more comfortable and secure in their home, potentially encouraging them to stay longer.

4. It demonstrates you’re a professional landlord

Taking and protecting a deposit shows tenants that you’re serious about doing things properly and by the book. It’s a key part of building a transparent, professional landlord-tenant relationship. Read Total Landlord’s article on nine steps to becoming a good and successful landlord for more guidance.

5. It gives you access to negotiation options

Disagreements at the end of a tenancy are rare – but they do happen. If you’ve taken and protected a deposit from your tenant with mydeposits, you can use our free independent resolution service to resolve claims fairly and impartially.

If you are looking to recover more than the deposit amount when the tenancy ends, you also have the option of low-cost tenancy mediation through the Property Redress Mediation Service who can help find a quick and agreeable solution.

While most tenancies end with the landlord and tenant reaching an agreement about the deposit, negotiation is sometimes unsuccessful. If the issue escalates to court, it can become both costly and time-consuming. That’s why having alternative ways to resolve issues early on benefits everyone involved.

How to protect the deposit properly

If you take a deposit, you must:

• protect it within 30 days of receiving it (not from the tenancy start date)
• provide your tenant with the prescribed information about where and how it’s protected, in the same 30 days
• keep the deposit protected for the duration of the tenancy
• return the deposit (less any agreed deductions) at the end of the tenancy

The tenant should also be given:

• details of how to claim back the deposit at the end of the tenancy
• the most common reasons for proposing costs when the tenancy ends
• their options on what to do if they disagree with the landlord’s proposed deposit refund and proposed settlement, following unsuccessful negotiation

Non protection is serious and can result in:

• a ban on serving a Section 21 notice
• a court order to repay up to three times the deposit amount in compensation plus the deposit

Case study: The cost of poor agent compliance

A landlord employed a letting agent to manage their property. When the tenant stopped paying rent, the landlord asked the agent for the deposit protection certificate and referencing documents – only to find they didn’t exist.

What went wrong:

• The agent had not protected the deposit
• No referencing was carried out
• The landlord was unable to make a rent guarantee claim because both points above were required to make a claim on the policy

The outcome:

The agent provided no response, so this case was a default decision based on the evidence and statements from the complainant landlord. It was decided that the agent had provided very poor service, and had not carried out their due diligence with the skill and care required, and the following awards were made:

• The agent was to compensate the landlord £1,442 equivalent to the amount of rent outstanding by the tenant, as the agent did not do what was required for the insurer to cover the claim
• The landlord was also awarded £500 for poor service and communication issues

Key takeaways:
Even if you use a letting agent, you as the landlord are ultimately responsible for making sure the deposit is protected. Landlords should make sure any letting agent they choose to manage their property:

• is accredited
• carries out proper referencing and provides a copy of the report to the landlord
• provides proof that the tenancy deposit has been properly protected

In addition, if you take out a rent guarantee policy, such as Total Landlord’s legal expenses and rent protection insurance, make sure that it provides the required cover and be aware of any restrictions.

Why a deposit is not a substitute for landlord insurance

Deposit protection helps to manage a range of end-of-tenancy issues, but it’s not a substitute for landlord insurance.

Even a full five-week deposit may not be enough to cover the full cost of damage or rent arrears – especially in high-rent areas. Landlords need cover that goes beyond what a deposit can provide. That’s why comprehensive landlord insurance is essential.

With rising landlord insurance claims for damage, and the average deposit at mydeposits being around £1,000, it may not be enough to cover things like accidental or malicious damage, or repairs to a property following an incident like a burst pipe.

Steve Barnes, Head of Broking at Total Landlord, advises:
“More landlords are seeing the value in combining deposit protection with comprehensive landlord insurance. The right policy can protect against malicious damage, rent loss and more – things a deposit alone may not cover.”

Once the Renters’ Rights Bill comes into force and landlords will not be able to unreasonably refuse a tenants’ request to keep a pet, it may be worth checking out policy extensions such as pet damage protection insurance for an extra layer of security. Our research shows that while pet damage claims are very small in number, in 35% of these claims, the amount proposed is greater than the deposit.

Changes to the law proposed under the Renters’ Rights Bill will also make legal expenses and rent protection insurance more necessary for most landlords.

Paul Shamplina, founder of Landlord Action, advises:

“With the removal of Section 21, landlords will need to navigate a more rigorous legal process under Section 8, which will be more time-consuming and costly. Legal expenses insurance serves as a crucial safety net, covering the substantial costs of legal proceedings, court fees, and professional representation, making sure that landlords can take necessary action without the burden of unexpected expenses. Coupled with rent protection insurance, which provides essential income protection when tenants default, these policies are more important than ever. In an evolving rental market where landlords face greater legal hurdles, having this level of protection is not just advisable—it’s essential for financial security and peace of mind.”

While deposit protection is a flexible tool for managing a range of end-of-tenancy issues, it’s not a substitute for landlord insurance.

The impact of the Renters’ Rights Bill and key takeaways

With the proposed Renters’ Rights Bill likely to become law in 2025, landlords can expect more scrutiny on how deposits are managed. The Bill aims to:

• ban Section 21 (‘no fault’) evictions
• strengthen tenants’ ability to challenge rent increases
• crack down on non-compliant landlords

Total Landlord’s Renters’ Rights Bill hub covers the Bill in more detail.

Tim Frome, Head of Government Schemes at Total Property, warns:
“As tenants become more aware of their rights, landlords must make sure they are fully compliant with deposit legislation. Having the support of mydeposits and other products and services provided by Total Property such as pet damage protection insurance, legal expenses and rent protection insurance, and tenancy mediation, will be vital for landlords and agents, and the deposit protection process will be more important than ever.”

With the proposed Renters’ Rights Bill likely to become law in 2025, landlords can expect more scrutiny on how deposits are managed. The Bill aims to:

• ban Section 21 (‘no fault’) evictions
• strengthen tenants’ ability to challenge rent increases
• crack down on non-compliant landlords

Total Landlord’s Renters’ Rights Bill hub covers the Bill in more detail.

Tim Frome, Head of Government Schemes at Total Property, warns:

“As tenants become more aware of their rights, landlords must make sure they are fully compliant with deposit legislation. Having the support of mydeposits and other products and services provided by Total Property such as pet damage protection insurance, legal expenses and rent protection insurance, and tenancy mediation, will be vital for landlords and agents, and the deposit protection process will be more important than ever.”

Final thoughts: Protecting your rental business

Taking a deposit remains one of the most effective ways to:

• safeguard your investment
• encourage responsible tenancy behaviour
• avoid issues at the end of the tenancy

By protecting the deposit correctly, documenting your tenancy clearly, and combining it with comprehensive insurance and, if necessary, professional mediation support, you’re giving yourself the best chance of a successful, stress-free letting experience.