Custodial vs Insured Deposit Protection: Complete UK Landlord Guide

What is deposit protection and why is it legally required?

Deposit protection is a legal requirement for every landlord in England and Wales who takes a deposit under an assured shorthold tenancy (AST). The Housing Act 2004 requires you to protect the deposit in a government-approved scheme within 30 days of receiving it.

The law was introduced to prevent landlords from unfairly withholding deposits at the end of a tenancy. Before mandatory protection, disputes over deposit deductions were common and tenants had limited recourse. The system now ensures:

• The deposit is held securely for the duration of the tenancy
• There is a clear, impartial dispute resolution process
• Tenants know where their deposit is and how to get it back
• Landlords who fail to comply face significant penalties

There are two types of deposit protection: custodial (the scheme holds the money) and insured (you keep the money but pay a fee). Both are legally valid. The choice between them affects your cash flow, admin burden, and how end-of-tenancy returns are handled.

For a complete step-by-step walkthrough, see our guide to protecting a tenant's deposit.

What is custodial deposit protection?

With custodial deposit protection, you transfer the tenant's deposit to the scheme. They hold the money in a secure account for the entire tenancy. At the end, the scheme manages the return process, including handling any disputes over deductions.

Custodial protection is the simpler of the two options. You hand over the money and the scheme takes care of everything from that point. When the tenancy ends, the scheme contacts both parties and releases the deposit according to what is agreed (or adjudicated if there is a dispute).

Key features of custodial protection:

• Free - no fees whatsoever
• Scheme holds the money - you transfer the deposit to them
• Scheme manages returns - they handle the end-of-tenancy process
• Free dispute resolution - alternative dispute resolution (ADR) is included
• Available from all three schemes - DPS, TDS, and mydeposits

The main drawback is that you lose access to the deposit money for the duration of the tenancy. For landlords with tight cash flow, particularly those with large deposits on multiple properties, this can be a consideration.

Learn more about the timeline for deposit protection and what happens at each stage.

What is insured deposit protection?

With insured deposit protection, you keep the tenant's deposit in your own account. You pay the scheme an annual fee to "insure" the protection. The insurance protects the tenant: if you fail to return the deposit, the scheme pays the tenant and pursues you for the money.

Insured protection gives you more control but comes with more responsibility. You are directly responsible for returning the deposit at the end of the tenancy, and you must ensure you have the funds available when needed.

Key features of insured protection:

• Annual fee - typically £20-30 per deposit per year
• You keep the money - deposit stays in your account
• You manage returns - you handle end-of-tenancy directly with the tenant
• Free dispute resolution - ADR is still included
• Available from TDS and mydeposits - DPS does not offer insured

Important: The "insurance" protects the tenant, not you. If you spend the deposit money and cannot return it, the scheme pays the tenant and then comes after you for the money. Never treat a tenant's deposit as your own funds, even under an insured scheme.

For a detailed comparison of all available options, see our deposit protection schemes comparison.

Side-by-side comparison table

Here is a direct comparison of custodial and insured deposit protection across every factor that matters to landlords:

The three government-approved schemes

There are only three government-approved deposit protection schemes in England and Wales. You must use one of these. No other scheme is legally valid for deposit protection.

Deposit Protection Service (DPS)

• Type: Custodial only
• Cost: Free
• Website: depositprotection.com
• Best for: Landlords who want the simplest, completely free option
• Notes: The most straightforward scheme. No insured option available. Widely used by self-managing landlords with smaller portfolios

Tenancy Deposit Scheme (TDS)

• Types: Both custodial (free) and insured (paid)
• Insured cost: From approximately £18 per deposit per year
• Website: tenancydepositscheme.com
• Best for: Landlords wanting flexibility to choose between custodial and insured
• Notes: Offers a good online portal for managing multiple deposits. Often the cheapest insured option

mydeposits

• Types: Both custodial (free) and insured (paid)
• Insured cost: From approximately £20 per deposit per year
• Website: mydeposits.co.uk
• Best for: Letting agents and landlords wanting insurance options with bulk account management
• Notes: Popular with letting agents. Offers multi-deposit accounts and some bulk pricing for larger portfolios

Scotland and Northern Ireland have separate deposit protection schemes. This guide covers England and Wales only.

For a more detailed breakdown of each scheme's features, fees, and user experience, see our deposit protection schemes comparison.

Prescribed information requirements

Within 30 days of receiving the deposit, you must give the tenant (and any relevant person, such as a guarantor) the prescribed information. This is a separate legal requirement from protecting the deposit itself. Failing to serve prescribed information carries the same penalties as not protecting the deposit at all.

The prescribed information must include:

• The name, address, and contact details of the deposit protection scheme
• The scheme's dispute resolution process and how to use it
• The landlord's name and contact details (or agent's details)
• The property address
• The deposit amount
• What the deposit can be used for (permitted deductions)
• How the tenant can apply to get the deposit back
• What happens if there is a dispute over deductions

Most deposit protection schemes provide a standard prescribed information form or certificate that includes all required details. You should provide this to the tenant and keep proof that it was served. Acceptable methods include:

• Hand delivery with a signed receipt
• Recorded delivery post
• Email with a read receipt or acknowledgement

Keep copies of everything. If a tenant later claims you did not serve prescribed information, the burden of proof is on you.

For templates and a step-by-step process, see our guides on prescribed information for deposits and how to serve prescribed information.

The 30-day protection deadline

You must protect the deposit in a government-approved scheme AND serve the prescribed information within 30 calendar days of receiving the deposit. This is a strict deadline with no exceptions.

The 30-day clock starts from the date you (or your agent) receive the deposit money, not from the tenancy start date. If a tenant pays a deposit on 1 March but the tenancy does not start until 15 March, you still have until 31 March to protect the deposit.

What counts as "receiving" the deposit?

• Bank transfer: The date the funds arrive in your account
• Cash: The date you receive the cash
• Cheque: The date you receive the cheque (though some argue it is the date it clears)
• Paid by a third party (e.g. guarantor): Still counts from the date received

Both actions must be completed within the same 30 days:

1. Protect the deposit in DPS, TDS, or mydeposits
2. Serve prescribed information to the tenant (and any relevant person)

If you protect the deposit on day 29 but do not serve prescribed information until day 35, you have still breached the rules and face the same penalties as if you had not protected the deposit at all.

Find out more in our guide: how long do you have to protect a deposit?

Penalties for non-protection

The penalties for failing to protect a deposit are severe. Tenants can claim compensation of 1x to 3x the deposit amount through the county court. Under the current rules, you also cannot serve a valid Section 21 notice until the deposit is properly protected. Note: Section 21 is being abolished from 1 May 2026 under the Renters' Rights Act 2025, but the deposit penalty rules continue to apply.

The penalties apply if you:

• Do not protect the deposit at all
• Protect it late (after the 30-day deadline)
• Fail to serve prescribed information
• Serve incorrect or incomplete prescribed information
• Protect the deposit in a scheme that is not government-approved

What tenants can claim

A tenant can apply to the county court for an order requiring you to:

1. Return the deposit (or protect it if the tenancy is ongoing)
2. Pay compensation of between 1x and 3x the deposit amount

The court decides the exact multiplier based on the circumstances. Deliberate or repeated non-protection typically results in the higher end of the scale.

Impact on possession proceedings

Under the current Housing Act rules, you cannot serve a valid Section 21 notice if the deposit is not protected. Although Section 21 is being abolished from May 2026, deposit protection remains a fundamental legal requirement. Under the Renters' Rights Act 2025, the penalty provisions for non-protection continue to apply regardless of Section 21 abolition.

For a full breakdown of the financial consequences, see our guide on deposit not protected penalties.

How disputes work in each scheme

Both custodial and insured schemes offer free alternative dispute resolution (ADR) when landlords and tenants cannot agree on deposit deductions at the end of a tenancy. The process differs slightly between the two scheme types.

Custodial dispute process

1. Tenant requests return - The tenant applies to the scheme for their deposit back
2. Landlord responds - You have a set period (typically 14-30 days depending on the scheme) to agree or propose deductions
3. Agreement or ADR - If both parties agree, the scheme releases funds. If not, either party can request free ADR
4. Evidence submission - Both parties submit evidence (check-in/check-out reports, photos, invoices, receipts)
5. Adjudicator decides - An independent adjudicator reviews the evidence and makes a binding decision
6. Scheme releases funds - The scheme pays out according to the decision

Custodial advantage in disputes: The money is already with the scheme. There is no risk of the landlord being unable or unwilling to return the funds.

Insured dispute process

1. Tenant contacts landlord - The tenant asks you directly for the deposit back
2. Negotiation - You and the tenant try to agree on any deductions
3. Dispute raised - If you cannot agree, the tenant (or landlord) raises a dispute with the scheme
4. Evidence submission - Both parties submit evidence
5. Adjudicator decides - Independent adjudicator makes a binding decision
6. Landlord pays - You must return the deposit as directed. If you fail to pay, the insurance covers the tenant and the scheme pursues you

Insured risk in disputes: You must actively pay out. If you have spent the deposit money, you need to find the funds from elsewhere. The insurance protects the tenant (the scheme pays them if you default), not you.

Tips for successful dispute outcomes

• Always conduct a thorough check-in and check-out inventory with photographs
• Keep dated evidence of the property condition at the start and end of the tenancy
• Retain receipts and invoices for any cleaning or repair costs you claim
• Communicate clearly with the tenant and try to agree deductions before escalating to ADR
• Use a deposit deduction calculator to ensure your claims are reasonable

For common disputes around cleaning costs, see our guide on deposit deductions for cleaning. For the full dispute process, read how to handle deposit disputes.

Cost comparison: custodial vs insured

Custodial protection is always free. Insured protection typically costs £18-30 per deposit per year, depending on the scheme and any bulk discounts. Over a multi-year tenancy, insured costs add up.

Here is what the costs look like over time for a single deposit:

For a landlord with 5 properties on insured schemes, the annual cost is £90-150. Over a decade, that is £900-1,500 spent on deposit protection fees alone.

However, if you are using the deposit money productively (e.g. it covers a month's mortgage payment on a property), the interest savings or cash flow benefit may outweigh the fee. Run the numbers for your specific situation.

Which scheme should you choose? Decision guide

The right choice depends on your portfolio size, cash flow needs, and how much admin you are willing to handle. Here is a practical decision guide.

Choose custodial if:

• You want the simplest, lowest-effort option
• You do not need the deposit money for cash flow
• You prefer the scheme to handle returns at end of tenancy
• You are a smaller landlord (1-5 properties) and want minimal admin
• You want to avoid any annual fees
• You are a new landlord and want the most straightforward setup

Choose insured if:

• You need the deposit money for cash flow (mortgage payments, emergency repairs fund)
• You have many properties and the tied-up deposits represent significant capital
• You prefer direct control over the return process
• You are confident you can manage the admin and keep the funds ring-fenced
• You are an experienced landlord with established processes

The bottom line

If in doubt, go custodial. It is free, simple, and the scheme handles the heavy lifting. Only choose insured if you have a specific, practical reason to keep the money, and even then, treat the deposit as ring-fenced funds that you must be able to return at any time.

Once you have chosen, see our step-by-step guide to protecting a tenant's deposit and download a deposit protection certificate template.

How LandlordOS helps with deposit management

LandlordOS is built for self-managing UK landlords who need to stay on top of compliance deadlines, including deposit protection. Here is how it helps.

• 30-day deadline reminders: When you record a new deposit, LandlordOS automatically tracks the 30-day protection deadline and sends reminders before it expires
• Prescribed information tracking: Log when you served prescribed information and to whom, with date stamps and proof of service records
• Deposit certificate storage: Upload and store your deposit protection certificates securely. AI-powered document reading extracts key details automatically
• Tenancy-linked records: Every deposit is linked to a specific tenancy, tenant, and property, so you always know which deposits are protected and where
• Compliance dashboard: See at a glance which deposits are protected, which prescribed information has been served, and any upcoming deadlines across your entire portfolio
• End-of-tenancy workflow: When a tenancy ends, LandlordOS guides you through the deposit return process and helps you document any deductions

Sign up free - no credit card required for 1-2 properties.