A tenancy deposit is not income when you take it, because it still belongs to the tenant. It becomes taxable only to the extent that you become entitled to keep it at the end of the tenancy. An amount kept for damage is income, and the cost of the repair is an expense, so the two largely cancel out; what you must not do is leave the retained deposit out and still claim the full repair cost.

Is a tenancy deposit income when you receive it?

No. HMRC’s Property Income Manual deals with deposits at PIM1052 and PIM1094, and the answer depends on which basis you use, although the result is similar.

  • Cash basis. PIM1094 explains that the deposit is still legally the tenant’s money during the tenancy, often held in a custodial or insurance scheme. It is recognised as a receipt only when, and to the extent that, the landlord becomes legally entitled to keep it at the end of the tenancy.
  • Accruals basis. PIM1052 says deposits should be recognised in line with generally accepted accounting practice, normally deferred and matched with the costs of the repairs or services they cover. Any part refunded to the tenant is excluded from receipts. Any part not refunded is included as income at that point, to the extent it has not already been recognised.

Most individual landlords are on the cash basis by default; see the cash basis for property income.

In England, a deposit taken on an assured periodic tenancy must be placed in a government approved tenancy deposit scheme within 30 days of receiving it. Assured periodic tenancies replaced assured shorthold tenancies on 1 May 2026. Under the Tenant Fees Act 2019, as it applies in England, a tenancy deposit is capped at five weeks’ rent where the annual rent is below £50,000, and six weeks’ rent where it is between £50,000 and £100,000. Because the money sits in a scheme, it is hard to argue it was ever yours until the end of the tenancy, which is consistent with the tax treatment.

When exactly does a retained deposit become taxable?

On the cash basis, in the tax year in which you become legally entitled to the amount. That is normally when you and the tenant agree the deductions, or when a scheme’s dispute process decides them. PIM1094 gives an example: a £1,100 deposit is protected in one tax year, the tenancy ends in the next, and £300 is agreed for damage to fixtures. The £300 is a receipt of the later year. The £800 returned to the tenant is never income.

A deduction agreed in March but paid out by the scheme in April falls on the date of entitlement, not the date the money reaches your account. If a letting agent handles the deposit, keep the agent’s end of tenancy statement showing what was agreed and when. PIM1094 treats rent collected by an agent as received when the agent receives it, and the same discipline is sensible for deposit deductions.

How are deductions for damage treated?

HMRC’s guidance on working out rental income says that if you keep a tenant’s deposit from a tenancy deposit scheme to cover damage, you can only claim repair expenses in excess of the amount of the deposit you kept. It applies the same rule to insurance payouts. That gives two equivalent ways to report the same facts:

  1. include the retained amount as a receipt and deduct the full repair cost; or
  2. leave the retained amount out and deduct only the part of the repair cost that exceeds it.

Either route gives the same profit. The error HMRC looks for is a mixture of the two: leaving the deposit out and claiming the whole repair bill.

Three further points follow from the general rules:

  • No repair carried out. If you keep a deduction but decide not to do the work, there is no matching expense. Under PIM1052 the amount not refunded is income.
  • Replacing furnishings. Replacing furniture or appliances is not a repair. It may qualify for replacement of domestic items relief instead, as the same HMRC guidance notes.
  • Improvements. If the damage prompts an upgrade, only the repair element is a revenue expense; see repairs vs improvements.

What about deductions for unpaid rent or bills?

A deduction for rent arrears is, in substance, rent. On the cash basis, rent is taxed when received, so arrears settled from the deposit are taxed when you become entitled to that money. On the accruals basis, PIM1101 requires rent to be included in the year it is earned, whether or not it has been paid, so applying the deposit simply collects a sum that has already been taxed.

Where the deposit reimburses a bill you have already deducted, such as a utility bill or council tax for a period the tenant was liable, the recovery is taxable. PIM1051 lists refunds or rebates of property business expenses that have been allowed for tax as receipts of the business.

Are holding deposits treated differently?

A holding deposit is taken before the tenancy starts, to reserve the property while checks are done. In England it is capped at one week’s rent and must be refunded unless the applicant fails a Right to Rent check, withdraws, does not respond, or gives false or misleading information that affects their suitability. If the tenancy goes ahead, it can be applied towards the first rent or the tenancy deposit with the tenant’s agreement.

A holding deposit applied to the first month’s rent is rent. HMRC’s manual does not deal with a forfeited holding deposit separately, but PIM1052 treats deposits not refunded as income once they are kept, and PIM1051 includes payments for a licence or other right over property among receipts. The safe course is to include a forfeited holding deposit as a receipt of the property business in the year you keep it.

How does it work in practice?

Illustration only. A landlord on the cash basis takes a £1,200 deposit, which is protected in a scheme. At the end of the tenancy, £350 is agreed for a damaged door and carpet cleaning, and £850 is returned. The work costs £420, paid in the same tax year.

Item Method 1 Method 2
Retained deposit as receipt £350 Nil
Repair cost deducted (£420) (£70)
Net effect on profit (£70) (£70)

The £850 refunded never appears in the accounts. If the repair is paid in a later tax year, method 1 shows the timing correctly on the cash basis: the £350 is income in the year of entitlement and the £420 is an expense in the year it is paid.

What are the common mistakes?

  • Including the whole deposit as rent when it is received.
  • Leaving retained deductions out of the return altogether, especially where an agent nets them off against repair invoices.
  • Claiming the full repair bill while ignoring the deposit kept to pay for it.
  • Keeping a deduction for damage that is never repaired and not reporting it.
  • Treating a recovered utility bill as tax free when the original bill was deducted.

Retained deposits are small, but they appear in agent statements and scheme records, so they are easy for HMRC to trace in a compliance check. For the wider picture of what is taxable, see how rental income is taxed and allowable expenses for landlords.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.