Do landlords pay tax on a deposit they keep?

Yes, on the part you keep, in the tax year you become entitled to keep it, such as 2026-27. While the deposit is protected it is not your income, and a repair it pays for nets off against it.

The rules below follow GOV.UK and HM Revenue and Customs' Property Income Manual (PIM), checked on 17 October 2026, and apply to individual landlords in England.

While you hold it, it is the tenant's money

GOV.UK says rental income is the rent you get from your tenants, including payments for furniture and for services such as repairs. A tenancy deposit is not on that list while you hold it.

HMRC's manual (PIM1094) explains why. A deposit is often held in a custodial or insured scheme during the tenancy, and it "is still legally retained by the tenant for the duration of the tenancy". So under the cash basis, a deposit or part of it only becomes a receipt when you become legally entitled to keep it at the end of the tenancy. The part you hand back is never income.

GOV.UK says landlords can use the cash basis, and you tick a box on your tax return to opt out of it. If you have opted out, PIM1052 says the deposit is normally deferred and matched with the costs of the repairs, and any part not refunded at the end of the tenancy is income at that point, to the extent it has not already been counted.

Protecting the deposit is a separate duty, covered in how to protect a tenancy deposit.

The part you keep, and the repair it pays for

PIM1051 lists "deposits/bonds taken from tenants" among the receipts of a property business. HMRC's own example in PIM1094 is a £1,100 deposit, with £300 kept for damage to the fixtures: the £300 counts in the tax year the landlord became entitled to it, and the £800 returned never counts.

GOV.UK adds the other half. If you keep your tenant's deposit to cover damage they caused, you can only claim repair costs above the amount of the deposit you kept. In our reading, the two fit together: the money kept for a repair and that repair cancel each other out, so you claim only what the deposit did not cover. Anything you keep that is not spent on a repair, such as unpaid rent, is income.

Situations at a glance

Holding deposits

GOV.UK's guidance on the fees you can charge says a holding deposit can be up to 1 week's rent, and you must refund it unless the applicant fails a Right to Rent check, withdraws, does not respond or contact you to progress the tenancy, or gives false or misleading information that affects their suitability. If you keep it, you must tell them why in writing within 7 days, or you may face a financial penalty. If they sign the tenancy, you refund it, or with their agreement put it towards the first month's rent or the tenancy deposit.

A worked example

A landlord in Leicester lets a flat on the cash basis. The tenant paid a £1,200 deposit, which went into a scheme. The tenancy ended in February 2027, in the 2026-27 tax year, and the deductions were agreed that month:

The £320 kept and the first £320 of the repair cancel out, in our reading. The £680 returned is never income. This is an example only.

What this means for you

In our reading, you pay tax on a kept deposit only where it is more than the cost of the work it paid for, or where it stands in for rent. Keep the scheme's record of what was agreed with each repair invoice. The guide to landlord expenses covers which repairs you can claim.

Steps to record a kept deposit

1. Leave the deposit out of your income while it is protected.
2. When the deductions are agreed, note the date and the amount kept for each reason.
3. Record unpaid rent kept from the deposit as rent received on that date.
4. For each repair, set the amount kept against its cost and record only the extra as an expense.
5. Keep the scheme's decision or your written agreement with the tenant, and the invoices.
6. If you keep a holding deposit, give the reason in writing within 7 days and record the amount as income.

Under Making Tax Digital (MTD), GOV.UK says each digital record shows the amount, the date and a category, and you still keep supporting documents such as bank statements and invoices. The free MTD check shows when it starts for you, and the landlord section has more guides.