Writing a charity reserves policy

A charity reserves policy explains why the trustees hold, or choose not to hold, free unrestricted funds, how much they aim to hold and what the money is for. The reserves figure starts with unrestricted funds and then removes functional fixed assets, social investments, designated funds for essential future spending and commitments not yet provided for. The trustees’ annual report must describe the policy and state the amount held, or say that there is no policy.

What counts as reserves for a charity?

The Charity Commission’s guidance Charity reserves: building resilience (CC19) defines reserves as the part of a charity’s unrestricted funds that is freely available to spend on any of its purposes. Restricted funds, including endowment, fall outside the definition, although a large restricted fund can reduce the need for reserves in the area of work it covers. Our guide to restricted, unrestricted and endowment funds explains the categories.

CC19 lists four items to take out of unrestricted funds when working out the figure:

• tangible fixed assets used to carry out the charity’s activities, such as its buildings;
• social investments, made both to further the charity’s purposes and to earn a return;
• designated funds set aside to meet essential future spending that future income could not cover;
• commitments that have not been provided for as a liability in the accounts.

Expendable endowment is also outside reserves, even though the trustees could convert it to income. Where group accounts are prepared, CC19 says the reserves stated must take account of the net assets of subsidiaries.

Does every charity need a reserves policy?

In practice, yes. Regulation 40(3)(p) of the Charities (Accounts and Reports) Regulations 2008 requires the annual report to describe the policies adopted for deciding the level of reserves, give details of material commitments and planned spending deducted in calculating reserves, and, where no policy has been adopted, say so. The Commission’s guidance on the trustees’ annual report asks every charity, including those preparing receipts and payments accounts, to explain its policy, state the amount of reserves and why they are held, and identify designated funds and material commitments.

There is a legal reason behind this. CC19 explains that trustees have a general duty to spend income within a reasonable time of receipt. To keep income back as reserves they rely on an express power in the governing document or, more commonly, an implied power, and they may use it only where holding reserves is in the charity’s best interests. Holding income without justification can amount to a breach of trust, and a missing reserves statement can suggest the power has not been exercised properly. The wider duties are covered in charity trustee duties.

A charity can decide to hold no reserves. CC19 says trustees adopting a zero level policy must explain it in the annual report and should set out how they would manage an unplanned closure, particularly where beneficiaries are vulnerable.

What should the policy actually cover?

CC19 rejects standard wording. The policy should be tailored and explain to funders, beneficiaries and the public exactly what reserves are kept for and when they would be used. Annex 1 of the guidance gives smaller charities five common reasons to hold reserves:

1. an unforeseen emergency or unexpected bill;
2. unforeseen day to day running costs, such as cover for long term staff absence;
3. a grant or other income source not being renewed, giving trustees time to respond;
4. planned commitments or designations that future income alone cannot meet, such as match funding;
5. short term gaps in the cash budget, for example where money is spent before a grant arrives.

For each reason the trustees estimate an amount and add them up to a target figure or range. Annex 2 sets out a fuller six step approach for charities with property, trading subsidiaries, endowments or a defined benefit pension scheme: understand the funds held, identify functional assets, assess the financial impact of risk, review income sources, consider future plans and commitments, then agree the policy. A charity with stable, predictable income can justify less; one dependent on a single contract coming up for tender can justify more.

CC19 also expects the policy to be reviewed at least annually and the actual level monitored during the year, not only at the year end.

How is the reserves figure calculated?

Work from the balance sheet and the funds note:

1. Take total unrestricted funds, including designated funds.
2. Deduct the net book value of tangible fixed assets used for the charity’s work that the trustees regard as essential. CC19 suggests asking whether an asset could be sold if needed; a high value office that could be replaced by rented space may be treated as available, unlike a specialist care home.
3. Deduct social investments.
4. Deduct designated funds set aside for essential future spending, and commitments not recognised as liabilities.
5. Consider any defined benefit pension asset or liability. CC19 notes a pension asset is normally designated and excluded, while a liability may justify designating funds to meet it.

Income accumulated without an express power to add it to endowment remains an unrestricted income fund. CC19 is clear that such funds count as reserves and must be reported as such.

How should designated funds be handled?

Designations are administrative. The trustees can cancel them, so they do not restrict the money legally. Where material funds are designated, CC19 says the reserves statement should quantify them, explain their purpose and give the likely timing of spending. Designations must reflect plans that existed at the year end; CC19 warns that no new designation can be created after the year end to disguise the true level of free reserves, and that designations which are never used or keep changing may attract regulatory attention.

How does this work in practice?

Illustration only. A community charity has unrestricted funds of £310,000 at its year end, made up as follows.

Item	Amount
Unrestricted funds per balance sheet	£310,000
Less: day centre used for services (net book value)	(£150,000)
Less: designated fund for minibus replacement next year	(£40,000)
Less: signed commitment to a partner project, not a liability	(£10,000)
Free reserves	£110,000

The trustees’ policy targets three to four months of unrestricted running costs, which they budget at £36,000 a month, giving a range of £108,000 to £144,000. The report states the £110,000 held, shows the reconciliation above, explains that it sits at the bottom of the range because the main grant is up for renewal, and says how the trustees plan to rebuild it.

What does the annual report have to say?

All charities must state the policy, the level of reserves and why they are held. For financial years starting on or after 1 January 2026, charities preparing accruals accounts produce a report that complies with the Charities SORP 2026, explained in our Charities SORP overview. Summaries published by ICAEW note that the SORP 2026 report must reconcile the reserves figure in the report to the accounts, so the table above is now expected rather than optional.

Where reserves are invested, CC19 says they should be held in a form that can be turned into cash when needed. Audited charities must also report their investment policy and performance. Charities with large permanent endowment may need lower reserves if they use total return investment, which CC19 recognises as giving extra flexibility.

What if reserves are too high or too low?

CC19 says reserves can look too high either because the policy does not explain them or because the charity is struggling to spend its funds. Where a charity has more resources than it needs for all its purposes, trustees must consider whether the purposes should be amended. Where reserves are below target, trustees are expected to plan how to raise funds, diversify income and mitigate the risk of sudden closure. Very low reserves can also bear on the going concern assessment.

What mistakes come up most often?

• Quoting total unrestricted funds as reserves without removing fixed assets used in the charity’s work.
• Counting restricted or endowment funds as reserves.
• Using boilerplate policy wording that does not link the target to the charity’s own risks.
• Creating designations after the year end to make reserves look lower.
• Not stating the actual amount held, or failing to compare it with the target.
• Leaving out the net assets of trading subsidiaries when group accounts are prepared.

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Related Accountapedia entries

• Designated funds vs restricted funds
• Transfers between charity funds
• Can a restricted fund be in deficit
• The statement of financial activities (SoFA)
• Accounts for charitable incorporated organisations

Sources

• GOV.UK: Charities and reserves
• legislation.gov.uk: SI 2008/629, regulation 40
• GOV.UK: Prepare a charity trustees annual report
• ICAEW: Charities and llp sorps announced whats changed

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.