A reserves policy sets out how much of your charity’s freely available money you hold back rather than spend, and why. There is no standard figure, and no correct number of months’ running costs to aim for. The amount is reasoned from your own charity’s risks and income, and the policy is the document that explains that reasoning to funders, your examiner and the Charity Commission.
Every charity has to state its reserves policy in its annual report. If the trustees have decided to hold no reserves, that decision has to be stated and explained as well. A paragraph copied from another charity’s accounts will not do the job here. The Commission may treat stock wording as a sign the thinking behind it has not been done.
If reserves are one of several finance questions your board has been meaning to work through, you can book a free clarity call.
What counts as reserves, and what doesn’t
Reserves are the part of your unrestricted funds that is freely available to spend on any of your charity’s purposes. You start with total unrestricted funds, then take things out.
Out come restricted funds, because those can only be spent on the purpose they were given for. Out comes endowment, both permanent and expendable, which sits outside the definition entirely. Out comes the value of the fixed assets you use to run the charity – your building, vehicles and equipment, and, under the 2026 SORP, leased assets too – because selling what you operate from is not really spending money you have spare. Out come investments you hold to further your purposes, designated funds you have committed to a specific future project, and commitments you have taken on but not yet recorded as a liability.
What remains is your reserves. This is the point where the figure tends to surprise people.
Picture a charity with £90,000 in the bank at year-end. It feels comfortable. Then look again: £40,000 is a restricted grant for next year’s youth programme, £15,000 is the written-down value of a minibus the charity runs its services with, and the trustees designated £10,000 six months ago towards a building deposit. The freely available reserve is £25,000, not £90,000. Same bank balance, a very different conversation with a funder.
Does your charity need reserves at all?
The Commission’s guidance (CC19) starts a small charity’s policy with a plain question: why might you need to hold funds back? The reasons are specific, and they are worth naming rather than assuming.
You might hold reserves against a grant not being renewed, so the trustees have time to act if income drops. Against an unexpected bill, or the cost of covering a long absence. Against the timing gap where money has to go out before a funding payment comes in. Against a commitment – matched funding, a planned purchase – that a single year’s income cannot cover on its own.
Work through that list, and one of two things happens. Either you can point to real risks that justify holding a reserve, or you conclude your charity does not need one. Both are legitimate answers. A zero reserves policy is allowed. What is not allowed is holding, or not holding, reserves without being able to say why.
How much should you hold?
There is no formula, and the guidance is direct about this: no single level of reserves, or even a standard range, is right for all charities. The figure has to come from your own circumstances.
You will have heard the rule of thumb that a charity should hold three to six months of running costs. It is not in the Commission’s guidance, and it is worth being wary of. A number pulled from a general ratio can sit a long way from what your charity actually needs; too high, and you tie up money that could be doing charitable work; too low, and the reserve does not cover the risk it was meant to. The better approach is to price the risks you named in the section above. Each one implies an amount. Add them up, or set a range, and you have a target that you can defend because you can show the working.
Reserves rarely sit on their own. The figure depends on how secure your income is, what you have committed to, and what your plans need; which is why it usually surfaces alongside funding and strategy rather than as a tidy accounting question. If your board wants to reach a reserves figure it can stand behind, a free 30-minute clarity call is a straightforward place to start.
What goes in the policy document
The policy itself is short. It should say what reserves the charity holds, why it holds them, what target or range the trustees have set, and how the amount held compares to that target. Where there is a gap either way, it should say what the trustees are doing about it. Where funds have been designated, it should name them, explain their purpose, and give the likely timing of the spend.
Two points from the 2026 SORP are worth building in while you write it. The reserves figure in your report has to match your accounts; where the link is not obvious, you need to show a reconciliation, so it is worth making the figure traceable from the start. And if your charity holds no reserves, or has negative net assets, the report now has to explain why it is still able to keep operating. That going concern explanation is not a punishment. For a new or stalled charity running close to the line, it is the honest account of how the charity keeps going, and writing it forces a useful conversation among the trustees.
Reviewing the figure, and reporting it
A reserves policy is not set once and filed. The Commission expects trustees to review it at least once a year, and to keep an eye on the actual level through the year rather than discovering a problem at the year-end. Reserves climbing well above target is a signal worth understanding, the same as reserves falling below it.
The policy goes in the trustees’ annual report every year. That is the point where the reasoning becomes public, and where a tailored, specific policy does more for funder confidence than a precise set of accounts with a stock paragraph bolted on the end.
This article is general information for UK charities and not advice on any specific situation. For your charity’s circumstances, speak to a charity-friendly accountant or independent examiner. An hour with someone qualified is rarely wasted on a question like this.
If reserves are part of a wider look at how your charity’s finances are run, our charity strategy support covers financial planning alongside the rest.
