What's the difference: tenancy deposit vs a holding deposit?

Understanding the distinction between a tenancy deposit and a holding deposit is essential for both landlords and tenants navigating the UK private rented sector. Whilst both involve upfront payments that secure a rental property, they serve completely different purposes, are governed by different rules, and carry distinct legal obligations.

With the Renters' Rights Act receiving Royal Assent on 27 October 2025 and major reforms commencing on 1 May 2026, the landscape for deposits is evolving. Understanding what is a holding deposit versus a tenancy deposit, when each is refundable, and how the new legislation affects these payments has never been more important.

This comprehensive guide explains everything UK landlords and tenants need to know about holding deposits and tenancy deposits, including the latest rules under the Renters' Rights Act, maximum amounts permitted, refundability criteria, and how these payments work in practice from 1 May 2026 onwards.

What is a holding deposit?

A holding deposit is a payment made by a prospective tenant to reserve a rental property whilst the landlord conducts tenant vetting and reference checks. It demonstrates the applicant's serious intent to rent the property and compensates the landlord for taking the property off the market during this period.

The holding deposit serves as a temporary commitment before the tenancy agreement is signed. It gives landlords security that the applicant won't simply disappear whilst they invest time and resources into background checks, and it gives tenants assurance that the property won't be let to someone else whilst their application is processed.

Key characteristics of holding deposits:

Amount - Capped at a maximum of one week's rent under the Tenant Fees Act 2019. For example, if the monthly rent is £1,000, the weekly rent is approximately £230, so the holding deposit cannot exceed £230.

Timing - Paid before the tenancy agreement is signed, typically at the point an applicant decides they want to proceed with renting the property.

Purpose - Reserves the property whilst the landlord completes tenant referencing, Right to Rent checks, and prepares the tenancy agreement.

Duration - The "deadline for agreement" is 15 days from when the landlord receives the holding deposit, unless a different deadline is agreed in writing between both parties.

Protection - Holding deposits do not need to be protected in a deposit protection scheme because they're temporary payments.

What is a tenancy deposit?

A tenancy deposit (sometimes called a security deposit) is a larger sum of money paid by the tenant to protect the landlord against potential damage to the property, unpaid rent, or other breaches of the tenancy agreement. This deposit remains held throughout the entire tenancy and is returned at the end, minus any legitimate deductions for damage beyond fair wear and tear, cleaning, or rent arrears.

Unlike holding deposits which are temporary, tenancy deposits provide long-term financial security for landlords throughout the rental period.

Key characteristics of tenancy deposits:

Amount - Capped at five weeks' rent where annual rent is below £50,000, or six weeks' rent where annual rent exceeds £50,000, under the Tenant Fees Act 2019.

Timing - Paid after the tenancy agreement is signed but before the tenant moves in (or shortly after move-in if agreed).

Purpose - Protects the landlord against damage, unpaid rent, or other tenant breaches throughout the tenancy.

Duration - Held for the entire tenancy duration, which could be months or years.

Protection - Must be protected in a government-approved tenancy deposit protection scheme within 30 days, and prescribed information must be provided to the tenant.

The three approved schemes are the Deposit Protection Service (DPS), MyDeposits, and the Tenancy Deposit Scheme (TDS).

Key differences between holding deposits and tenancy deposits

Understanding the fundamental distinctions helps both parties avoid confusion and potential disputes.

Amount and caps

Holding deposit - Maximum one week's rent. If monthly rent is £1,200, maximum holding deposit is approximately £276.

Tenancy deposit - Maximum five weeks' rent (or six weeks if annual rent exceeds £50,000). For £1,200 monthly rent, maximum tenancy deposit is approximately £1,384.

The Tenant Fees Act 2019 sets these caps, and any amount exceeding these limits constitutes a prohibited payment that must be refunded.

When paid

Holding deposit - Paid before the tenancy agreement is signed, during the application and reference checking stage.

Tenancy deposit - Paid after both parties sign the tenancy agreement but typically before the tenant takes occupation.

Purpose and function

Holding deposit - Reserves the property whilst checks are conducted. Demonstrates serious intent. Compensates landlord for removing property from market.

Tenancy deposit - Provides security against damage, unpaid rent, or breaches throughout the tenancy. Acts as financial protection for the duration of the rental.

Refundability

Holding deposit - Must be refunded in most circumstances. Can only be kept in four specific situations defined by law (detailed below).

Tenancy deposit - Returned at tenancy end, minus any legitimate deductions for damage beyond fair wear and tear, cleaning, or arrears. Disputes resolved through adjudication.

Legal protection requirements

Holding deposit - Does not need to be protected in a deposit scheme. No prescribed information required.

Tenancy deposit - Must be protected in one of three government-approved deposit protection schemes within 30 days. Prescribed information must be served to the tenant within the same timeframe.

What happens to the money

Holding deposit - Either refunded to the tenant, or with the tenant's consent, put towards the tenancy deposit or first month's rent once the tenancy agreement is signed.

Tenancy deposit - Held in a custodial scheme (where the scheme holds the money) or an insured scheme (where the landlord holds it with insurance protection) for the duration of the tenancy.

Is a holding deposit refundable?

This is one of the most common questions from prospective tenants. The answer is yes, in most circumstances, but there are specific exceptions.

When holding deposits must be refunded

Landlords must refund the holding deposit within seven days in these situations:

The landlord decides not to proceed - If you change your mind about letting to the applicant for any reason (provided it's not one of the four permitted retention reasons below), the full holding deposit must be returned.

The tenancy agreement is signed - Once both parties sign the agreement, the holding deposit must either be returned or, with the tenant's written consent, put towards the tenancy deposit or first month's rent.

The 15-day deadline expires - If the "deadline for agreement" passes without a signed tenancy (unless the delay is the tenant's fault), the deposit must be returned.

The tenant passes all checks - If the applicant passes referencing, Right to Rent checks, and credit checks, but you simply don't proceed, the deposit is refundable.

When can landlords keep holding deposits?

The Tenant Fees Act 2019 permits landlords to retain holding deposits in only four specific circumstances:

The tenant withdraws - If the prospective tenant decides not to proceed after paying the holding deposit, you can keep the money. This compensates you for the time the property was off the market.

The tenant fails Right to Rent checks - If the applicant does not have legal permission to rent in the UK, you cannot proceed with the tenancy and can retain the deposit. Right to Rent checks are mandatory in England.

The tenant provides false or misleading information - If the applicant materially misrepresents their circumstances (such as overstating income, hiding adverse credit, or providing fake employment references), you can keep the deposit. The information must be material to your decision to let.

The tenant fails to take reasonable steps - If the tenant doesn't cooperate with the application process, ignores requests for documents, fails to sign the agreement within the deadline despite your reasonable efforts, or otherwise doesn't take reasonable steps to proceed, you may retain the deposit.

If you keep a holding deposit, you must provide written reasons to the tenant within seven days of your decision. Failure to provide these written reasons means you must refund the deposit even if you had valid grounds to keep it.

Do you get holding deposit back if you fail referencing?

This depends on why the referencing failed.

If you genuinely fail referencing through no fault of your own - For example, your employer confirms a lower salary than you stated in good faith, or a previous landlord reference reveals information you weren't aware would be shared. In these cases, the landlord must refund your holding deposit because the failure wasn't due to false information.

If you fail because you provided false or misleading information - For example, you claimed to earn £40,000 but actually earn £25,000, or you stated you had no adverse credit when you have CCJs. In these cases, the landlord can legally retain the holding deposit.

The distinction rests on whether you knowingly misrepresented material facts. Honest mistakes or information you weren't aware of don't justify retention. Deliberate misrepresentation does.

Holding deposit law UK and the Tenant Fees Act 2019

The Tenant Fees Act 2019 fundamentally reformed permitted payments in the private rented sector, including strict rules governing holding deposits.

Key provisions affecting holding deposits:

Maximum amount - One week's rent only. Calculated as (monthly rent × 12) ÷ 52.

15-day deadline - The default "deadline for agreement" is 15 calendar days from receiving the holding deposit. This can be varied by written agreement, but must be documented.

Refund timeline - Seven days to refund from the date of the signed tenancy agreement, the date you decide not to proceed, or the expiry of the deadline for agreement.

Single holding deposit - Landlords cannot take holding deposits from multiple applicants simultaneously for the same property. Once you accept a holding deposit, you must stop marketing the property to others until you've made a decision on that application.

Prohibited payments - Anything charged beyond the permitted holding deposit, tenancy deposit, rent, utilities, and specific other allowed payments constitutes a prohibited payment and must be refunded. Penalties for charging prohibited fees range from £5,000 to £30,000 for repeat offences.

The Renters' Rights Act and deposit changes from 1 May 2026

The Renters' Rights Act, which received Royal Assent on 27 October 2025, introduces significant changes to the private rented sector from 1 May 2026 onwards. Whilst the core holding deposit and tenancy deposit rules remain broadly similar, important changes affect how deposits interact with possession proceedings.

Rent in advance restrictions

One major change affecting the deposit timeline is the restriction on rent in advance. From 1 May 2026, landlords cannot take more than one month's rent in advance before the tenancy agreement is "entered into" (signed by both parties).

This means the typical letting process from May 2026 will look like this:

1. Tenant pays holding deposit (up to one week's rent)

2. Landlord conducts referencing and checks

3. Both parties sign the tenancy agreement

4. Tenant pays tenancy deposit (up to five weeks' rent)

5. Tenant pays first month's rent, minus any holding deposit applied

6. Tenant moves in

The holding deposit can be applied towards the first month's rent payment, which helps tenants manage upfront costs. However, landlords cannot demand rent payment before the agreement is signed, fundamentally changing cash flow timing for property lets.

Deposit protection and possession proceedings

The Renters' Rights Act strengthens deposit protection requirements by making them prerequisites for possession orders.

From 1 May 2026, courts will only grant possession orders if:

The landlord has protected the deposit - The tenancy deposit is held in a government-approved scheme, prescribed information was served correctly, and all legal requirements were met, OR

The deposit has been returned - Either in full, or with deductions agreed between landlord and tenant, OR

A court determination has been made - An application to the county court under Section 214(1) of the Housing Act 2004 regarding deposit protection compliance has been determined, withdrawn, or settled.

Importantly, landlords who protected deposits late can still obtain possession orders, provided the deposit is in a scheme and prescribed information has been served before proceedings begin. However, late protection may still result in financial penalties of one to three times the deposit value if the tenant applies for compensation.

Exceptions - The deposit protection requirement doesn't apply to possession claims under Grounds 7A and 14 (anti-social behaviour), recognising the urgency of these cases.

Abolition of Section 21 and deposit implications

From 1 May 2026, Section 21 "no-fault" evictions are abolished entirely. All assured shorthold tenancies automatically convert to periodic assured tenancies, which continue indefinitely until validly ended.

This means deposit protection compliance becomes even more critical because:

• All possession proceedings must use Section 8 grounds

• Courts scrutinise landlord compliance more closely

• Deposit protection failures can block legitimate possession claims

• The stakes for getting deposits right from the start are higher

Landlords should ensure deposits are protected within 30 days and prescribed information is served correctly to avoid complications when possession becomes necessary for legitimate grounds like rent arrears or property sale.

What is the tenancy deposit scheme?

The tenancy deposit protection scheme is a legal requirement introduced in 2007 to protect tenant deposits and provide fair dispute resolution at the end of tenancies.

All deposits for assured shorthold tenancies (and from 1 May 2026, periodic assured tenancies) must be protected in one of three government-approved schemes:

Deposit Protection Service (DPS) - Offers both custodial (free) and insured (fee-based) protection options. Contact: 0330 303 0030.

MyDeposits - Provides custodial and insured schemes. Contact: 0333 321 9401.

Tenancy Deposit Scheme (TDS) - Offers both protection types. Contact: 0300 037 1000.

Custodial vs insured schemes

Custodial schemes - The scheme holds the deposit throughout the tenancy. Free to use. The deposit is returned based on agreement between landlord and tenant, or following adjudication if disputed. Landlords don't have access to the funds during the tenancy.

Insured schemes - The landlord holds the deposit in their own account but pays a protection fee (typically £10-£30 per deposit). The landlord has access to the funds and any interest earned. If a dispute arises, the disputed amount must be submitted to the scheme for adjudication.

Most small landlords prefer custodial schemes for simplicity and zero cost.

How tenancy deposits work throughout a tenancy

Understanding the complete deposit lifecycle helps both parties manage expectations and comply with legal requirements.

Taking the deposit

After the tenancy agreement is signed, the tenant pays the deposit (remember, maximum five weeks' rent for most properties). From 1 May 2026, this payment timing changes slightly due to rent-in-advance restrictions, but the deposit amount limits remain the same.

Protecting the deposit

Within 30 days of receiving the deposit, landlords must:

1. Place it in a government-approved deposit protection scheme

2. Provide the tenant with prescribed information about the protection

Prescribed information includes details about which scheme holds the deposit, how to apply for its return, how the adjudication service works, and what to do if there's a dispute.

Failure to protect deposits or serve prescribed information can result in penalties of one to three times the deposit value, and from 1 May 2026, may prevent landlords from obtaining possession orders (except for anti-social behaviour grounds).

During the tenancy

The deposit remains protected throughout the tenancy. Landlords cannot access it (in custodial schemes) or must keep it ring-fenced (in insured schemes). The deposit provides security but cannot be used for routine maintenance or rent collection during the tenancy.

End of tenancy and return

When the tenancy ends (either by tenant notice or possession proceedings), the deposit is returned as follows:

If both parties agree - The landlord proposes deductions (or none), the tenant agrees, and the deposit is distributed accordingly. Most deposit returns work this way.

If there's a dispute - Either party can initiate the scheme's free adjudication service. Both submit evidence (photos, inventory reports, invoices, tenancy agreement), and an independent adjudicator decides how the deposit should be split.

Strong evidence is crucial for deposit claims. Comprehensive check-in reports with photographs, dated evidence of property condition, quotes or invoices for repairs, and clear documentation of communications all support legitimate deductions. August's document management features help landlords organise this evidence efficiently.

How long can landlord hold deposit after tenancy ends?

This is another frequently asked question, particularly from tenants expecting quick returns.

There's no specific legal deadline for returning deposits in England and Wales, but deposit protection schemes expect landlords to act promptly:

10 working days - Most schemes expect landlords to propose any deductions and supporting evidence within 10 working days of the tenancy ending.

Reasonable timeframe - If no deductions are being made, deposits should be returned within a "reasonable" time, typically interpreted as 10-14 days.

Dispute process - If deductions are disputed, the timeline extends to accommodate the adjudication process, which typically takes 28 days from the dispute being logged.

Unreasonably withholding deposits or delaying returns without justification can damage landlord reputation and may result in tenant complaints to local authority enforcement teams or the Private Rented Sector Ombudsman (once established under the Renters' Rights Act).

Practical tips for landlords managing deposits

Effective deposit management protects your investment whilst maintaining positive tenant relationships and legal compliance.

Document everything - Create comprehensive property inventories with photographs before tenants move in. Use August's document storage to keep everything organised by property and tenancy.

Protect deposits immediately - Don't wait until day 30. Protect deposits within a few days of receipt to ensure you never miss deadlines.

Keep clear records - Note when holding deposits are paid, when they're refunded or applied to rent/deposit, when tenancy deposits are received, and when protection and prescribed information are completed.

Communicate clearly - Explain to tenants exactly what each payment is for, when it will be refunded or applied, and what your timeline is for referencing.

Use property management software - Tools like August provide automated reminders for deposit protection deadlines, secure document storage for inventories and prescribed information, and rent tracking to ensure financial records are clear.

Photograph extensively - At check-in and check-out, take far more photos than you think necessary. These are your primary evidence in disputes.

Understand fair wear and tear - Not all damage is deductible. Our detailed guide on wear and tear in rental propertiesexplains what you can and cannot claim for.

Common mistakes to avoid

Treating deposits as income - Deposits are not rent. They must be protected and can only be used for legitimate end-of-tenancy claims. Never use deposits to cover routine maintenance or running costs.

Taking deposits before the agreement is signed - Whilst this was common historically, from 1 May 2026 the sequence must be: holding deposit → signed agreement → tenancy deposit. Ensure you follow the correct order.

Exceeding legal caps - One week for holding deposits, five weeks (or six for high-rent properties) for tenancy deposits. Any excess is a prohibited payment requiring immediate refund.

Poor evidence at check-out - If you can't prove damage existed at move-out but not move-in, you can't make deductions. Always compare check-in and check-out evidence side by side.

Missing protection deadlines - Whilst the Renters' Rights Act allows late protection, it doesn't prevent financial penalties. Protect on time, every time.

Final thoughts

Understanding what is a holding deposit versus a tenancy deposit is fundamental to successfully navigating the UK private rented sector. Holding deposits (maximum one week's rent) reserve properties during the application stage and are refundable in most circumstances. Tenancy deposits (maximum five weeks' rent) provide long-term security throughout the tenancy and must be protected by law.

With the Renters' Rights Act reforms commencing on 1 May 2026, deposit protection becomes even more critical for landlords' ability to regain possession when legitimate grounds arise. The abolition of Section 21 evictions and strengthened compliance requirements mean getting deposits right from the start isn't just good practice - it's essential risk management.

Whether you're a landlord managing your first buy-to-let property or an experienced portfolio owner, understanding holding deposit meaning, tenancy deposit protection requirements, and the refundability rules protects both your investment and your tenant relationships. Use professional property management tools like August to track deposits, store evidence, and stay compliant with all your legal obligations in one simple app.

Disclaimer: This article is a guide and not intended to be relied upon as legal or professional advice, or as a substitute for it. August does not accept any liability for any errors, omissions or misstatements contained in this article. Always speak to a suitably qualified professional if you require specific advice or information.