Custodial vs Insured Deposit Schemes: Which Should England Landlords Use?

Choosing between a custodial vs insured deposit scheme is one of the first practical decisions an England landlord makes after agreeing a let, and it is one that quietly affects your cash flow, your admin burden and your exposure at the end of a tenancy. Both routes are legal, both protect your tenant’s money, and both are run by the same three government-approved providers. The difference is simple to state but easy to underestimate: with a custodial scheme the provider holds the cash; with an insured scheme you hold the cash and pay for the privilege. This guide explains how each model works in 2026, what they cost, the deadlines that apply, the dispute mechanics, and how to decide which fits your portfolio.

The deposit protection rules themselves are unchanged by the Renters’ Rights Act 2025. The duty to protect a deposit, serve prescribed information and use an authorised scheme still flows from the Housing Act 2004 (sections 213 to 215). What the Act did change is the tenancy structure around the deposit, and we flag those knock-on effects below.

Custodial vs insured deposit scheme: the core difference

Every assured tenancy deposit in England must be protected in one of three government-backed schemes within 30 days of receipt, and the tenant must be given the prescribed information within the same window. Each of the three providers, the Deposit Protection Service (DPS), the Tenancy Deposit Scheme (TDS) and mydeposits, offers two ways to discharge that duty:

• Custodial protection. You transfer the deposit money to the scheme, which holds it in a ring-fenced account for the life of the tenancy. At the end, the money is released according to what you and the tenant agree (or what an adjudicator decides). The custodial service is free to use.
• Insured protection. You keep the deposit money in your own account and instead pay the scheme a fee to insure it. The scheme guarantees the tenant will get back whatever they are owed, even if you fail to pay it. You must hand the money to the scheme only if there is an unresolved dispute.

That single distinction, who physically holds the money, drives every other difference in cost, cash flow, risk and administration. For the wider context of why protection is compulsory at all, see our guide to tenancy deposit protection in England explained.

How custodial schemes work

With a custodial scheme you log the tenancy, then send the deposit to the provider. The money sits with the scheme, typically earning no interest for you (any interest usually stays with the scheme or is paid to the tenant, depending on the provider’s terms). You have nothing to reconcile, no segregated client account to maintain and no annual fee to budget for.

At the end of the tenancy, you log in and propose how the deposit should be split. If the tenant agrees, the money is released, usually within a few working days. If they dispute your proposed deductions, the scheme’s free alternative dispute resolution (ADR) service adjudicates, and the disputed portion stays with the scheme until the decision is made. You never have to find the cash to refund a tenant, because the scheme already holds it.

Custodial protection suits landlords who value simplicity, who do not want their own money tied up in deposit balances, and who are comfortable not having use of the funds during the tenancy.

How insured schemes work

With an insured scheme you keep the deposit in your own bank account and pay the provider a protection fee (per tenancy or via an annual membership, depending on the provider and your volume). You still must serve the prescribed information within 30 days and register the tenancy with the scheme. The tenant’s money is protected by the scheme’s insurance: if you disappear or refuse to pay what is owed, the scheme pays the tenant and pursues you.

The trade-off is that you are responsible for refunding the tenant at the end of the tenancy out of your own funds. If there is a dispute, you must transfer the disputed amount to the scheme so it can be held pending adjudication. Insured protection appeals to landlords and agents who want the deposit money available, for example to offset against cash-flow timing, or because they hold many deposits and prefer to manage the float, and who are willing to pay a fee and carry the refund obligation in exchange.

A word of caution: holding the money yourself raises the stakes if you get the admin wrong. If you fail to protect within 30 days or to serve prescribed information, the penalties (one to three times the deposit, plus a barrier to possession) bite regardless of which model you chose, but with an insured scheme you also still physically hold money you may be ordered to repay. See landlord fines in England 2026 for the full penalty picture.

Side-by-side comparison

Both models give the tenant the same statutory protection and the same free adjudication route, so the choice is about your economics and appetite for admin, not about tenant protection. To compare the three providers themselves rather than the two models, read the 3 government-backed deposit schemes in England compared.

The cost and cash-flow trade-off, with a worked example

The headline question is usually “is the insured fee worth keeping the money?” The honest answer for most small landlords is: rarely, unless you can put the float to genuinely productive use.

Consider a single property let at £1,200 a month. The annual rent is £14,400, so the maximum deposit under the five-week cap is five weeks’ rent, £14,400 ÷ 52 × 5 = £1,384.61.

• Custodial route. You send £1,384.61 to the scheme. It costs nothing. You lose the use of £1,384.61 for, say, a two-year tenancy. At a 4% savings rate that float would have earned roughly £55 a year, or about £110 over two years, money you forgo.
• Insured route. You keep the £1,384.61 but pay a protection fee. Across the market these fees vary; assume a typical per-deposit cost in the region of £20-£30 plus any membership. Over a two-year tenancy you might pay £40-£60 in fees, and you keep whatever the float earns.

On this single property the numbers are close enough that admin simplicity should usually decide it: the custodial route wins for most individual landlords because it removes the refund obligation and the segregated-account discipline entirely. The picture flips for a letting agent or portfolio landlord holding fifty deposits. There, the aggregate float is large (over £69,000 in this example), the per-deposit insured fee buys meaningful working capital, and the agent already runs a client account, so the marginal admin cost is low. Scale, not principle, is what makes insured protection attractive.

Treat these figures as illustrative. Provider fees, interest rates and your own circumstances change the maths, run your own numbers before committing.

Deadlines and compliance apply to both models

Whichever model you pick, the same statutory deadlines apply and missing them is where landlords get hurt:

1. Protect within 30 days of receiving the deposit. With custodial, “protect” means the money reaches the scheme; with insured, it means the tenancy is registered and insured.
2. Serve the prescribed information within 30 days, the scheme details, deposit amount, property and the statutory clauses. This is a separate duty from protecting the money, and tribunals treat a failure to serve it as seriously as a failure to protect.
3. At the end of the tenancy, repay promptly, custodial via the scheme’s release, insured from your own funds, and put any agreed deductions and the balance in writing. Our deposit return letter template covers exactly what that confirmation should say.

A subtle Renters’ Rights Act point: because all assured tenancies are now periodic and there are no fixed terms, you do not “renew” a tenancy at the end of a term. The original protection generally continues for the same tenancy, but if the tenant or property changes you must re-check your protection and re-serve prescribed information. Do not assume a deposit protected years ago is still compliant if the tenancy or parties have materially changed.

Disputes: identical free adjudication, different cash mechanics

Both models route end-of-tenancy disagreements through the scheme’s free ADR service, and the evidential standard is the same: you must prove your deductions, usually with a signed inventory, check-in and check-out reports, dated photos and receipts. The adjudicator’s decision is final and binding for the disputed sum.

The practical difference is where the money sits while you argue. Under custodial protection the disputed amount is already with the scheme, so the tenant cannot pressure you and you cannot accidentally spend it. Under insured protection you must transfer the disputed sum to the scheme once a dispute is raised; if you drag your feet, you risk a complaint and potential penalty. Either way, weak evidence loses, our guide to disputing unfair deposit deductions through your scheme shows the tenant’s side of the same process and underlines why your documentation has to be airtight.

Which should you choose? A decision framework

There is no universally “better” model, but a few rules of thumb hold for England landlords in 2026:

• One or a handful of properties, self-managing? Choose custodial. It is free, the scheme holds and releases the money, and you carry no refund obligation. The simplicity almost always outweighs the modest interest you forgo.
• A growing portfolio or a letting agency with a client account? Insured can pay off. The aggregate float is large, you already have the financial controls, and the per-deposit fee is small relative to the working capital you retain.
• Worried about your own record-keeping discipline? Choose custodial. If there is any risk you might dip into the float or lose track of which money belongs to whom, do not hold deposits yourself.
• Want to maximise tenant trust and a clean check-out? Both work, but custodial removes any suggestion that you are sitting on the tenant’s money, which can reduce friction.

You can also mix models across a portfolio or move a deposit from insured to custodial at renewal, provided you re-serve prescribed information correctly. And remember the holding deposit you may have taken before the tenancy is a separate sum with its own rules, see holding deposits explained, and if you roll it into the tenancy deposit, the combined amount must be protected like any other.

Frequently asked questions

Is a custodial or insured deposit scheme safer for the tenant?

Equally safe. Both are government-approved and both guarantee the tenant gets back what they are owed. The difference is purely about who holds the cash, the scheme (custodial) or you (insured), not about the level of protection.

Do I have to pay to use a deposit scheme?

Custodial protection is free to landlords. Insured protection charges a fee, either per deposit or through an annual membership, in exchange for letting you keep the money in your own account. The free adjudication service is included in both.

Can I switch from an insured to a custodial scheme during a tenancy?

Yes. You can move the deposit into custodial protection, but treat it as a fresh protection event: transfer the money to the scheme and re-serve the prescribed information so the tenant has accurate, current details. Keep a dated record of the change.

What happens to the deposit if I fail to protect it in time?

You lose the right to use certain possession grounds until you put it right, and the tenant can claim a penalty of one to three times the deposit through the county court. This applies to both models, choosing insured protection does not reduce the penalty for missing the 30-day deadline or failing to serve prescribed information.

Did the Renters’ Rights Act 2025 change deposit protection?

No. The core protection rules under the Housing Act 2004 (sections 213 to 215) are unchanged. What changed is the tenancy structure: all assured tenancies are now periodic with no fixed terms, so there is no fixed-term “renewal”, but you must still re-check protection and re-serve prescribed information whenever the tenancy or the parties materially change.

Who keeps the interest earned on a custodial deposit?

With custodial protection the money is held by the scheme, and any interest is dealt with under that scheme’s terms, typically retained by the scheme or paid to the tenant, not the landlord. With insured protection you keep the money in your own account, so you keep any interest it earns.

Coming soon

Tenancy Pilot is launching soon, and its certificate and compliance tracker will keep your deposit protection on the rails whichever model you pick, logging the date you took each deposit, counting down the 30-day protection and prescribed-information deadlines, and reminding you to re-serve information when a tenancy changes. Pair that with the built-in deposit return letter generator and you have an end-to-end, audit-ready record for every let. Want to be first to use it? Join the waitlist and we will let you know the moment it goes live.

This article is general information for England landlords, not legal advice. Deposit and tenancy rules can change and your situation may differ. Always check the current guidance on GOV.UK and legislation.gov.uk, and consult a qualified solicitor before acting.