Charity Restricted Funds Explained

A restricted fund is money your charity can only spend on a specific purpose, because the donor said so. An unrestricted fund is money the trustees can spend on anything within the charity's objects. Everything else in charity fund accounting is a variation on that one distinction, and getting it right matters because spending a restricted fund on something else is a breach of trust — not a bookkeeping error.

The Charity Commission's guidance in CC19 defines a restricted fund as "Funds subject to specific trusts, which may be declared by the donor(s) or with their authority (eg in a public appeal) or created through legal process, but still within the wider objects of the charity." Unrestricted funds are "Income or income funds which can be spent at the discretion of the trustees in furtherance of any of the charity's objects."

Note the last clause of the restricted definition. A restriction narrows what the money can be used for, but it can never take the money outside the charity's own objects. A donation to a homelessness charity earmarked for a school minibus is not a restricted fund — it is a donation the charity cannot accept on those terms.

What actually creates a restriction

This is where small charities most often go wrong, usually by being over-cautious.

A restriction is created when the donor specifies the purpose, or when the charity solicits money for a stated purpose and the donor gives on that basis. Three common cases:

• A grant with a purpose. Almost always restricted. The funding agreement is the evidence.
• A public appeal for a named thing. "Help us replace the roof" creates a restriction over everything given in response, whether or not each donor said anything.
• A single donor attaching a condition in writing. Restricted, provided it is within the charity's objects.

And three cases that are not restrictions:

• A general donation from someone who mentioned they care about the youth work. A preference expressed in conversation is not a trust. Unless the charity solicited it for that purpose or the donor made it a condition, this is unrestricted income.
• Money the trustees have decided to set aside for a project. That is a designated fund, which CC19 defines as "Part of the unrestricted funds which trustees have earmarked for a particular project or use, without restricting or committing the funds legally." Trustees can un-designate it whenever they choose. Nobody outside the board can hold them to it.
• Membership subscriptions or fees for a service. Unrestricted, unless the charity has said otherwise.

The practical rule: if the restriction did not come from outside the charity, it is a designation, not a restriction. Boards that record their own budget decisions as "restricted funds" end up unable to respond to a cash crisis, because they have talked themselves into a constraint the law never imposed.

Endowment — the third category

Endowment funds are, per CC19, "Funds which the trustees are legally required to invest or to keep and use for the charity's purposes. Endowment may be expendable or permanent."

Permanent endowment is, in CC19's words, "property that your charity must keep rather than spend". CC19 describes two types: "Money or other assets given to your charity for investment. Only the investment income can be spent", and "Property given to your charity which must be used only for a particular purpose. For example, land or buildings given for use as a school or recreation ground". The income-only rule therefore attaches to the first type; the second is a use restriction on the property itself.

"Must keep rather than spend" is also not absolute. CC19 says plainly that "Trustees can in certain circumstances spend permanent endowment but should check if they need the Commission's authority". The routes sit in the Charities Act 2011: section 281 lets trustees of an available endowment fund resolve that it "ought to be freed from the restrictions with respect to expenditure of capital that apply to it", where they are satisfied the trust's purposes "could be carried out more effectively" if capital could be spent as well as income; sections 282 to 284 cover the larger funds where the Commission's concurrence is needed. The Charities Act 2022 widened this further from 14 June 2023 — see our Charities Act 2022 guide for what changed.

Expendable endowment can be converted to income and spent, at the trustees' discretion. Most small operating charities hold none of either. If you do — typically an old trust with a legacy fund or a piece of land — it is worth confirming which type you have and taking advice before spending capital, because the answer determines both what you can do with it and whose authority you need.

Tracking the split without drowning in it

Fund accounting sounds heavier than it needs to be. For a charity with three or four restricted pots, the minimum viable version is a table with one row per fund and four columns:

Fund	Opening balance	Income in year	Spent in year	Closing balance

Every transaction is coded to exactly one fund. Nothing is uncoded. The closing balances add up to your total funds.

Three habits make this work in practice:

1. Code on the way in, not at year end. Reconstructing eight months of fund allocation in March is the single most common cause of a treasurer resigning.
2. Apportion shared costs by a written rule, not by feel. If a restricted project uses 30% of the coordinator's time, the payroll cost is split 30/70 and the rule is written down once. An examiner will ask what the basis was.
3. Watch for overspends. A restricted fund cannot go negative. If a project has cost more than its grant, the excess falls on unrestricted funds, and that needs to be a visible decision rather than a discovery.

Any system that handles fund accounting properly will do this for you — that is the main thing separating charity finance software from ordinary bookkeeping, as covered in our guide to choosing charity accounting software. A spreadsheet works too, provided somebody actually maintains it.

How the funds appear in your accounts

The format depends on your income band.

Under section 133 of the Charities Act 2011, a charity may elect to prepare "a receipts and payments account" and "a statement of assets and liabilities" instead of a full statement of accounts if its gross income does not exceed the section 133 threshold. That threshold is raised to £500,000 by the Charities Acts 1992 and 2011 (Substitution of Sums) Order 2026, which substituted £500,000 for £250,000 in section 133 and came into force on 30 September 2026. The switch is keyed to your year end rather than the calendar: article 5(6) provides that the substitutions "do not apply in relation to any financial year of a charity ending before 30th September 2026." A charity whose year ended 31 March 2026 is still on £250,000 for that year.

Either way, the fund split has to be visible. In receipts and payments accounts, that usually means separate columns for restricted and unrestricted funds with a total column. In accruals accounts, the statement of financial activities carries a column per fund type, and the notes explain the movement on each material restricted fund — what it was for, what came in, what was spent, and what remains.

Your independent examiner will look at this specifically. It is one of the few things in a small charity's accounts that cannot be reconstructed from the bank statement alone, which is exactly why it gets checked. Our independent examination guide covers what else the examiner is looking for, and the charity accounts guide sets out what each format must contain.

Restricted funds and your reserves policy

The two are directly connected, and the connection is often stated backwards.

Reserves are unrestricted funds that are freely available to spend. Restricted funds are not reserves. Neither, in most formulations, are designated funds, because they are earmarked even if not legally committed — though trustees can release them.

So a charity holding £120,000 of which £95,000 is restricted grant money for a two-year project has £25,000 of reserves, not £120,000. Charities that report the larger figure look comfortable on paper and run out of money anyway. Our reserves policy guide covers how to set and explain the target figure, and the free SORP tier calculator will tell you which reporting tier your income puts you in.

A short year-end checklist

• Every fund has an opening balance that agrees to last year's closing balance
• No restricted fund has a negative closing balance
• Shared costs have been apportioned on a stated basis
• Each material restricted fund can be described in a sentence: purpose, funder, period
• Any restricted fund that has been fully spent is closed rather than carried at nil forever
• Designated funds are labelled as designations, not restrictions

If you can tick those six, the fund accounting section of your accounts will not be where your examination gets held up.

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This guide covers charities registered in England and Wales. The Charity Commission for Northern Ireland and the Office of the Scottish Charity Regulator have separate accounting regimes. This is general guidance based on published Charity Commission guidance and the Charities Act 2011 — if you are unsure whether a particular fund is restricted, your independent examiner or auditor is the right person to confirm it before the accounts are signed.

Sources

• Charity Commission CC19: Charities and reserves
• Charities Act 2011, section 133 — receipts and payments accounts
• The Charities Acts 1992 and 2011 (Substitution of Sums) Order 2026
• SI 2026/427, article 5 — transitional provision
• Charities SORP