Deposit scheme fees and interest explained

Why it matters

Incorrectly handling deposit scheme fees or interest can lead to significant financial penalties and legal complications. Landlords who fail to protect a deposit or mismanage its protection can face claims for compensation amounting to several times the deposit value. Compliance also builds trust with your tenants and ensures smoother tenancy management, particularly during the deposit return process.

Legal requirements

• Landlords in England and Wales must protect deposits within 30 days of receiving them.
• Deposits must be placed with one of the government-approved tenancy deposit schemes.
• In England and Wales, tenancy deposit scheme fees are typically paid by the landlord or agent.
• The Tenant Fees Act 2019 prohibits charging tenants any fees related to deposit protection.
• Any interest accrued on deposits held in custodial schemes funds the scheme's operations, not the tenant.
• Landlords must provide tenants with prescribed information about their protected deposit.
• In Scotland, deposits must be protected within 30 working days of the tenancy start date.
• Northern Ireland requires deposits to be protected within 28 days of receipt.
• The maximum deposit amount in England is five weeks' rent, or six weeks' rent for annual rent exceeding 50,000 pounds.
• Deposits in Scotland, Wales, and Northern Ireland do not have a statutory cap, but must be reasonable.

Common mistakes

• Attempting to charge tenants for deposit protection scheme fees.
• Failing to protect the deposit within the statutory timeframe.
• Not understanding how interest on protected deposits is managed by custodial schemes.
• Believing that tenants are entitled to receive interest on their protected deposit.
• Choosing a non-approved scheme to save on protection fees.
• Overlooking the requirement to provide prescribed information to the tenant.
• Deducting scheme fees from the deposit at the end of the tenancy.
• Not accounting for potential scheme fee increases when setting budgets.

Practical guidance

• Research and choose a government-approved tenancy deposit scheme before receiving a deposit.
• Budget for the costs of protecting the deposit, as these are your responsibility.
• Ensure you understand the specific rules of your chosen scheme regarding fees and interest.
• Protect the deposit and serve the prescribed information promptly after receipt.
• Keep clear records of when the deposit was received, protected, and all related communications.
• Regularly review your understanding of deposit protection legislation, as rules can change.
• Familiarise yourself with the differences in deposit protection rules across the UK nations.
• Inform your tenants clearly which scheme their deposit is protected with and how it operates.
• Confirm the maximum permitted deposit amount for your tenancy in England.
• Utilise the scheme's dispute resolution service if deductions are contested, as detailed in /knowledge/deposits/deposit-dispute-adjudication-explained.

Understanding Deposit Protection Scheme Fees

When you take a tenancy deposit, you are legally required to protect it with one of the government-approved tenancy deposit schemes. In England and Wales, these are the Deposit Protection Service (DPS), MyDeposits, and Tenancy Deposit Scheme (TDS). Each scheme offers two main service types: custodial and insurance-backed. Custodial schemes hold the deposit money for free, as they use any accrued interest to fund their operations. Insurance-backed schemes allow you, the landlord or agent, to retain the deposit, but you must pay a fee to the scheme to insure it. The Tenant Fees Act 2019 explicitly prohibits charging tenants for any costs associated with deposit protection, including scheme fees. This means the landlord or their agent is responsible for these fees. It is important to factor these costs into your financial planning for each tenancy.

How Interest on Tenancy Deposits is Handled

A common point of confusion for landlords and tenants alike is how interest on protected deposits is managed. For deposits held in custodial schemes, any interest earned on the money accrues to the scheme itself. This interest is not paid out to either the landlord or the tenant. Instead, it is used by the scheme to cover its operational costs, allowing it to provide its service free of charge to landlords for holding the deposit. This is a fundamental aspect of how custodial schemes function. If you opt for an insurance-backed scheme, you retain the deposit in your own bank account. In this scenario, any interest earned on that deposit belongs to you, the landlord. However, you must pay the scheme's insurance fee. Tenants are not entitled to receive interest on their protected deposit from either type of scheme, regardless of where the money is held.

Deposit Cap and Financial Implications

In England, the amount you can charge as a tenancy deposit is capped by the Tenant Fees Act 2019. For tenancies where the annual rent is less than 50,000 pounds, the maximum deposit is five weeks' rent. If the annual rent is 50,000 pounds or more, the deposit cap is six weeks' rent. There is no statutory cap on tenancy deposits in Wales, Scotland, or Northern Ireland, but any deposit taken must be reasonable. These caps, where they apply, impact the overall value of the deposit. For custodial schemes, a larger deposit will theoretically generate more interest for the scheme. For insurance-backed schemes, the fee you pay is often proportional to the deposit amount, meaning a larger deposit can lead to higher insurance fees for the landlord. Therefore, understanding the cap and the fee structure of your chosen scheme is vital for financial planning.

Prescribed Information and Deposit Protection Compliance

Beyond simply protecting the deposit, landlords have a crucial legal obligation to provide the tenant with 'prescribed information'. This information confirms details about where their deposit is protected, how to get it back, and what to do if there is a dispute. Failure to provide this information within the statutory timeframe, which is usually 30 days in England and Wales, can result in significant penalties, even if the deposit itself was protected. For more details on these penalties, see our article on /knowledge/deposits/deposit-protection-timescales-and-penalties. The prescribed information package typically includes a certificate of deposit protection and an information leaflet from the scheme. It is your responsibility to ensure the tenant receives and acknowledges this information.

Differences Across the UK Nations

While the core principle of deposit protection is consistent across the UK, there are important variations in specific rules and scheme options. In Scotland, deposits must be protected within 30 working days of the tenancy start date with one of three approved schemes: MyDeposits Scotland, SafeDeposits Scotland, or Letting Protection Service Scotland. Like England, these schemes operate both custodial and insurance models, with similar rules for fees and interest. In Wales, deposits must be protected within 30 days of receipt, also using DPS, MyDeposits, or TDS. Northern Ireland has its own scheme providers, including Deposit Protection Service Northern Ireland, MyDeposits Northern Ireland, and Tenancy Deposit Scheme Northern Ireland, with a protection deadline of 28 days from deposit receipt. While the Tenant Fees Act 2019 applies only to England, similar prohibitions on charging tenants for deposit protection exist in Wales under the Renting Homes (Fees etc.) (Wales) Act 2019. It is vital for landlords to understand the specific legislation applicable to their property's location.

Dispute Resolution Services and Their Costs

All approved tenancy deposit schemes offer free, independent dispute resolution services. This service is invaluable if the landlord and tenant cannot agree on deposit deductions at the end of the tenancy. As explained in /knowledge/deposits/deposit-dispute-adjudication-explained, the adjudicator will review evidence from both parties to make a fair decision. The key point here is that using this service is free for both landlords and tenants. This means you cannot charge your tenant, or deduct from their deposit, for the costs associated with using the dispute resolution service. The schemes cover these administrative costs as part of their overall operational funding, which, in the case of custodial schemes, comes from the interest earned on deposits.