Charity Reserves Policy: Template and Best Practice Guide

A reserves policy is one of the most commonly expected governance practices for UK charities. The Charity Commission routinely asks about reserves in its guidance and annual return process. It does not need to be complicated — for most small charities, a single page explaining how much unrestricted money you hold and why is sufficient. But not having one at all is a common compliance gap that the Commission queries regularly, particularly when charities hold large reserves relative to their spending.

What is a reserves policy?

A reserves policy explains how much unrestricted money (reserves) your charity aims to hold, and the reasons for that target. "Unrestricted" means funds that are not tied to a specific purpose by the donor or a grant condition.

The policy should answer three questions:

1. How much do we hold in reserves right now?
2. How much should we hold, and why?
3. What will we do if reserves are above or below our target?

Why it matters

The Charity Commission's reporting guidance requires charities to include a statement about reserves in their trustees' annual report. Funders frequently check reserves levels before awarding grants — a charity with 3 years of expenditure sitting in the bank and no policy explaining why may struggle to justify a funding application.

At the other end, a charity with no reserves and no plan for building them is financially vulnerable. A reserves policy helps trustees have an honest conversation about financial sustainability.

How to set your reserves target

There is no single "correct" level of reserves. The right amount depends on your charity's circumstances:

Consider your expenditure commitments: If your charity has fixed costs (rent, insurance, staff salaries), you need enough reserves to cover these for a reasonable period if income stopped. For a charity with no staff and no fixed premises, this could be very low.

Consider your income stability: Charities that rely on a single funding source need higher reserves than those with diverse income streams. If 80% of your income comes from one grant, what happens when that grant ends?

Consider your plans: If you are saving for a specific purpose (equipment, a building project), include this in your policy.

Common target ranges:

• 3-6 months of operating costs — the most common target for small charities with some fixed costs
• 6-12 months — appropriate if income is volatile or depends on a single source
• Below 3 months — may be acceptable for charities with no fixed costs and stable income, but explain why

What to include in your policy

A practical reserves policy for a small charity should cover:

1. Current reserves level State the amount of unrestricted reserves at the end of the most recent financial year.

2. Target range Set a minimum and maximum. A range is better than a single number because it allows for normal fluctuation. For example: "The trustees aim to hold between 3 and 6 months of annual operating costs in unrestricted reserves."

3. Rationale Explain why you chose this range. Reference specific risks: "The charity's venue hire costs £X per year and cannot be reduced at short notice. Three months of reserves covers this commitment while alternative funding is secured."

4. Action plan if reserves are outside the range

• Below minimum: How will you build reserves? Reduce spending? Increase fundraising? Apply for a specific grant?
• Above maximum: How will you deploy excess reserves? Fund a specific project? Increase service delivery?

5. Review schedule State how often the policy will be reviewed. Annually is standard — align it with your financial year end and trustees' annual report preparation.

Template

Here is a practical template you can adapt:

Reserves Policy — [Charity Name]

Approved by trustees: [Date] Review date: [Date — typically 12 months later]

Current unrestricted reserves: £[amount] as at [date of last accounts]

Target range: The trustees aim to hold unrestricted reserves equivalent to [X] to [Y] months of annual operating costs, currently £[amount] to £[amount].

Rationale: This target reflects [the charity's fixed cost commitments / income volatility / planned expenditure]. Specifically: [list the key factors, e.g., "annual venue hire of £X, insurance of £Y, and the risk of the main grant ending"].

If reserves fall below the minimum: The trustees will [reduce discretionary spending / prioritise unrestricted fundraising / review commitments].

If reserves exceed the maximum: The trustees will [allocate excess to [specific project or purpose] / increase service delivery].

Review: This policy is reviewed annually alongside the preparation of the trustees' annual report.

Common mistakes

No rationale. Stating "we hold 6 months of reserves" without explaining why is not a policy — it is a number. The Charity Commission wants to see the reasoning.

Never reviewing it. A reserves policy written 5 years ago with outdated figures is worse than no policy at all. Review annually.

Confusing restricted and unrestricted funds. Restricted funds (money given for a specific purpose) are not reserves. Your reserves policy covers unrestricted funds only.

For a broader view of your compliance obligations, see our charity compliance checklist.

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This guide applies to charities registered in England and Wales. This is general guidance, not financial advice.

Sources

• Prepare a charity annual return — GOV.UK
• Charity Governance Code 2025 — Principle 6: Managing Resources and Risks