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Developing a reserves policy

Charity trustees must manage their charity in the best interests of the charity and its beneficiaries. This includes looking after income, spending, future plans, and risks. One way to do this is by keeping a reserves fund - money set aside for unexpected costs or future needs.

If your charity holds reserves, you should have a reserves policy. The Developing a reserves policy guide (in the sidebar) looks into this in more detail.

Key considerations

  • A charity’s funds include money it hasn’t spent yet - both restricted and unrestricted. All funds must be used to support the charity’s work. Reserves are part of the unrestricted funds,  money the charity can use for any of its purposes. Reserves are set aside for:

    • unexpected costs
    • future opportunities

    Reserves do not include:

    • restricted or endowment funds
    • fixed assets (like buildings or land)
    • money already committed or planned for future spending

    Having a clear reserves policy helps trustees manage risks and explain their decisions to funders and the public. See section 2 of the Developing a reserves policy guide for more information and examples.

  • Charities face risks throughout their lifetime - financial, reputational or operational. Trustees must manage these risks to make sure the charity can continue helping its beneficiaries now and in the future.

    Reserves are funds set aside to help a charity deal with unexpected events or changes. Each charity will have its own reasons for holding reserves, based on its goals, activities, and future plans.

    Reserves can help a charity:

    • cover costs if income drops suddenly.
    • pay staff during sickness or parental leave (beyond legal minimums).
    • start new projects or services.
    • repair or replace equipment or property.
    • take advantage of new opportunities.
    • show responsible financial management.
    • handle emergencies or crises.

     

    By holding the right level of reserves, trustees show they’re planning ahead and protecting the charity from future challenges. It also builds trust with donors, funders, beneficiaries and the public.

  • All registered charities in Northern Ireland must report on their finances each year (see our annual reporting section for more detail). This includes:

    • reviewing their financial position at year-end.
    • including a statement in the trustees’ annual report about reserves.

     

    Trustees should explain whether the charity holds reserves, why and how they plan to use them. If the charity doesn’t hold reserves, the report should explain why that’s the best decision.

    Some charities have a clause in their governing document allowing them to hold reserves. If not, trustees can still do so if they believe it’s in the charity’s best interests.

    For unincorporated charities, trustees must balance the need for reserves with the legal principle that income should be spent within a reasonable time. 

    A written reserves policy helps:

    • show good financial management.
    • explain decisions to funders, donors, and the public.
    • avoid holding too much or too little in reserves.
    • plan how reserves will be built up or used.

     

    Without a clear policy, a charity may struggle to justify its financial decisions.

  • There’s no fixed rule. The right amount of reserves depends on your charity’s size, structure, activities, and risks. Even similar charities may hold different levels of reserves.

    Trustees should carry out a basic financial review and consider:

    • expected income this year and in future.
    • planned spending now and ahead.
    • future needs, risks, and costs.
    • legal or contractual obligations if the charity had to close.

     

    This includes:

    • staff costs (salaries, pensions, redundancy).
    • rent or lease agreements.
    • payments owed to suppliers.

     

    Trustees should check how much unrestricted funding is available and whether it’s enough to cover any shortfall.

    Once you’ve decided on a suitable level of reserves, explain your reasoning in a reserves policy. This should be available to funders, regulators, and other stakeholders.

    See section 3.12 of the Developing a reserves policy guide for more information.

  • To build up reserves, trustees should look at where the charity’s income comes from and which funds are unrestricted (can be used for any purpose).

    • Review income sources: Can any be increased or expanded?
    • Check grant conditions: Most grants are restricted, but some may allow a portion to go into reserves.
    • Plan project budgets carefully: Make sure project costs are fully covered so unrestricted funds aren’t used to top them up.
    • Use general donations: Money from public donations or regular giving (not tied to a specific cause) can go into reserves.
    • Sell services: If your charity has specialist skills, you might earn income by offering services to others.
    • Cut costs: Reduce waste, negotiate discounts, and seek donations in kind.
    • Manage debts: Improve payment terms and collect money owed quickly to free up cash.
    • Separate funds: Keep general funds and reserves clearly separate to avoid dipping into reserves unnecessarily.

     

    Let supporters know why your charity needs reserves. This builds trust and confidence.

    See section 3.2 of the Developing a reserves policy guide for more information and examples.

  • If your charity has reserves, trustees may choose to invest some  to earn extra income. Before doing so, it’s important to think carefully about the:

    • purpose of reserves: Reserves are usually for short- to medium-term needs. Make sure they’re still accessible if needed.
    • risk level: Higher returns (e.g. from shares or bonds) often come with higher risks, including losing money.
    • investment goals: Be clear on what your charity wants to achieve — income, stability, or preserving capital.

     

    Trustees must understand and manage risks, including financial loss or reputational damage. If something goes wrong, trustees are better protected if they’ve followed proper procedures and considered risks carefully. Learn from any setbacks to improve future decisions.

    Think abut diversifying investments. 

    • Choose a mix of assets to reduce risk from market changes.
    • High-risk assets (like derivatives or commodities) should only be part of a well-balanced portfolio.
    • Get professional investment advice unless trustees have suitable experience.

     

    There are also legal and tax points to consider.

    • Investments must meet charity law and HMRC rules to qualify for tax relief.
    • If investments aren’t approved by HMRC, your charity may lose tax exemptions.

     

    See section 3.3 of the Developing a reserves policy guide for more information and examples.

  • Charity trustees should keep an eye on reserves throughout the year as part of regular financial reporting. They should: 

    • record when reserves are used and why.
    • note when reserves go above target and understand the reason.
    • review if a drop in reserves is temporary or needs a full reassessment.
    • update the reserves policy if the charity’s strategy or activities change.
    • report any major changes in reserves or the reserves policy in the trustees’ annual report (TAR).

     

    The TAR is a key document, which must be filed as part of the charities' annual return to the Commission each year.  For more information, including explaining why you have no reserves or  have excess reserves or unspent funds, see our Developing a reserves policy guide. 

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