Smaller charities are continuing to spend more than they bring in, according to the Charity Commission’s analysis of annual return data.

Charities with an income under £500,000 reported a combined operating deficit of £290 million in 2024. Those above that threshold reported a surplus of £1.30 billion.

The shortfall is smaller than the £416 million deficit recorded the year before. Even so, it has put fresh focus on reserves policies, particularly for smaller organisations that are least able to absorb a sustained gap between income and spending.

What the Charity Commission expects

The Commission’s guidance on reserves, CC19, does not set a target level. Instead, it asks trustees to decide what is right for their own charity, based on its particular circumstances and needs.

Trustees are then expected to explain that reasoning in a published reserves policy.

The Commission regards having a policy as part of good governance, even where a charity currently holds little or nothing in reserve.

Many charities work to a rule of thumb of around three months’ running costs. However, the Commission has never endorsed this as a benchmark. What it wants to see is that trustees have given the question proper thought and can justify the figure they have chosen.

Why reserves are under pressure

Costs have risen sharply for many charities. The increase in employer National Insurance contributions from April 2025 has added significantly to payroll bills, while inflation in recent years has eroded the real value of cash reserves.

A charity holding the same balance as it did a few years ago can now do noticeably less with it.

At the same time, returns on invested reserves have been mixed, slowing the rate at which reserves can be rebuilt.

Trustees need to strike a balance, as reserves that are too low leave a charity exposed to cash flow gaps and unexpected costs, as many organisations discovered during the pandemic.

Equally, reserves that look high without a clear explanation can draw criticism from funders and donors, who may question why money is being held back rather than spent on the charity’s aims.

Is it time to review your reserves policy?

As a trustee, it is good practice to:

  • Revisit your target level every year – A figure set a few years ago may no longer reflect today’s costs or how volatile your income has become.
  • Be clear about what counts as reserves – Free reserves should be shown separately from designated and restricted funds, which are not available for general use.
  • Explain your reasoning – A good policy sets out why the figure has been chosen, rather than simply stating a number.
  • Consider the new Charities SORP – The updated SORP, which is now in effect, places greater emphasis on narrative reporting in the trustees’ annual report. It is a good opportunity to show how your reserves policy links to the risks your charity faces.

A policy that stands up to scrutiny

With smaller charities under the most financial strain, a well-reasoned and up-to-date reserves policy is one of the clearest ways trustees can show they are managing risk responsibly.

We have helped many charities assess their reserves and put in place a policy that is appropriate for their circumstances.

If you would like us to review your approach, please get in touch with our team.