There is no standard figure: CC19 says there is no single level, or even a range, of reserves that is right for all charities, and it warns that a policy “should not be just a standard form of wording”. So a template is a structure to fill with your own reasons and numbers. This guide sets out what counts as reserves, how to set and justify the target, a worked template for a fictional charity, and how the policy is reviewed and reported.
The rule: CC19, the annual report and the power to hold reserves
The Charity Commission’s guidance Charity reserves: building resilience (CC19), updated 16 September 2026, is written “for trustees of charities of all sizes and types, whether they are companies, Charitable Incorporated Organisations (CIOs), trusts or unincorporated associations”. Its key message is that the Commission “expects trustees to decide, publish, implement and monitor their charity’s reserves policy” so that they can meet their duties to act in the charity’s interests, protect its assets, act with reasonable care and skill and be accountable. The policy should be one that “fully justifies and clearly explains keeping or not keeping reserves”, plans for “the maintenance of essential services for beneficiaries” and reflects “the risks of unplanned closure”.
Reporting is where the expectation becomes a requirement. CC19 says “All charities must include in their annual report their policy on reserves, stating the level of reserves held and why they are held. Where the charity does not have a reserves policy in place, it should include a statement to that effect.” The Charities SORP requires a statement of the reserves policy in the annual report, and if a charity has no policy “the regulations require this fact to be stated in the annual report”. CC19 uses “must” for legal or regulatory requirements and “should” for good practice the Commission expects, and says it expects trustees “to be able to explain and justify your approach, particularly if you decide not to follow good practice”.
Behind both sits a point of law that makes the policy more than a formality. CC19 explains that “Charity trustees have a general legal duty to spend income within a reasonable time of receipt”; to hold income back as reserves they rely on an express power in the governing document, which “is not common”, or on an implied power, and “Trustees are justified in exercising their power to hold income reserves, whether express or implied, only if in their considered view it is necessary to do so in the charity’s best interests.” If the power is used without justification, “the holding of income in reserve might amount to a breach of trust”. The reserves policy is the written justification.
What counts as reserves, and how to calculate them
CC19 defines reserves narrowly: “Reserves are that part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.” Start from the unrestricted funds in the balance sheet and take out what cannot be spent without harming the charity’s work. The items CC19 says “should be excluded from reserves” are:
- tangible fixed assets used to carry out the charity’s activities, such as land and buildings;
- social investments;
- designated funds set aside to meet essential future spending, such as funding a project that could not be met from future income;
- commitments that have not been provided for as a liability in the accounts.
Restricted funds and endowments are outside the definition altogether, though they affect how much the charity needs: a restricted fund that can pay for a whole area of work may reduce the need for unrestricted reserves for that work. Where a charity has trading subsidiaries and prepares group accounts, “the amount of reserves stated must take account of the net assets of subsidiaries”. Designations need care. CC19 says that “no new designations can be set up retrospectively after the year end to disguise the true level of unrestricted funds held in reserve”, and that designations which are never used or are frequently changed “risk bringing the charity into disrepute with donors and financial supporters”. A designation is a trustee decision with a date, and it should be minuted as one.
So the calculation is: unrestricted funds, less functional fixed assets, less social investments, less properly designated funds, less unprovided commitments, equals free reserves. That is the figure the policy compares with its target and the annual report states.
Setting the target: why reserves are needed, and how much
CC19’s Annex 1, a simple approach for smaller charities, asks three questions. The first is whether the charity needs reserves at all, and it gives five typical reasons: “the risk of an unforeseen emergency or other unexpected need for funds”; “covering unforeseen day-to-day operational costs”, such as temporary staff to cover a long-term sick absence; “a source of income, eg a grant, not being renewed”; “planned commitments, or designations, that cannot be met by future income alone”, such as “plans for a major asset purchase” or a project needing matched funding; and “the need to fund short-term deficits in a cash budget, eg money may need to be spent before a funding grant is received”. If the trustees conclude that no reserves are needed, “then you must explain that in your annual report.”
The second question is how much, and the answer is built reason by reason: an amount for contingencies, judged against the risks and their likelihood; a small fund for unforeseen operating costs; for uncertain income, “reserves equivalent to a number of weeks of income”, to allow time to find new income or cut related spending; a specific sum for each planned commitment; and enough to cover the troughs in the cash budget. CC19 says the target “can be expressed as a target figure or a target range” and should be informed by income and expenditure forecasts, “the reliability of each source of income”, future needs and commitments, and the likelihood of a shortfall. CC19 does not express targets in months of running costs. That is a common shorthand, but CC19 warns that trustees who do not relate their reserves to factors such as these “will have difficulty in satisfactorily explaining why they hold (or do not hold) the amount of reserves that they do”.
Larger charities with more complex activities and structures – for example those holding significant endowed funds or property, operating a defined benefit pension scheme or trading through subsidiaries – should use CC19’s Annex 2, which builds the policy in six steps: understanding the nature of the funds held, identifying functional assets, understanding the financial impact of risk, reviewing sources of income, the impact of future plans and commitments, and agreeing the policy. Step three ties the reserves policy to the risk register: the risks that would cost money if they happened are the ones reserves are there to absorb. Where reserves are set at zero or a low level, CC19 expects the trustees to have a strategy “for an orderly closure in the event of an unplanned shutdown and insolvency”, particularly where beneficiaries are vulnerable.
A charity reserves policy template, worked through
The policy below is for a fictional charity, the Eastgate Youth Music Trust, which runs after-school music groups with two part-time staff and rents its rehearsal space. Every figure is invented to show the method; replace each heading’s content with your own.
- Purpose. “This policy explains why the trustees of Eastgate Youth Music Trust hold reserves, the level they aim to hold, and how reserves will be used, checked and reviewed.”
- Definition. “Reserves are the Trust’s unrestricted funds that are freely available to spend, excluding fixed assets used in our work and funds the trustees have designated for a specific purpose, as described in the Charity Commission’s guidance CC19.”
- Why we hold reserves. “Most of our income comes from two grants renewed each year and from termly fees. If a grant ended we would need time to find new funding or to reduce activity in an orderly way, honouring our notice periods to staff and our rent agreement. We also hold a contingency for instrument repairs and replacement, and cover for the gap between paying termly costs and receiving grant instalments.”
- How much. “Three months of staff and rent costs if a grant were lost: £27,000. Contingency for repairs and replacement: £4,000. Cash-flow cover for the autumn term before grant instalments arrive: £6,000. Target range: £33,000 to £41,000.”
- Current position. “At 31 March our unrestricted funds were £58,000. After excluding instruments and equipment used in our work (£9,000) and £12,000 designated by the trustees in January for replacing the timpani, free reserves were £37,000, within the target range.”
- If reserves move outside the range. “Below £33,000, the trustees will agree a plan to rebuild reserves within two years through fundraising and budgeting. Above £41,000, the trustees will consider spending the excess on our purposes or designating it for a planned project, and will explain the position in the annual report.”
- Where reserves are held. “In an instant-access account with a UK bank or building society, so that they are available when needed.”
- Using reserves. “Reserves may be drawn on only by decision of the trustees, recorded in the minutes or as a written resolution under the governing document, stating the amount and the reason.”
- Monitoring and review. “The treasurer reports the reserves position against the target at every trustees’ meeting. The trustees review this policy and the target at least once a year, when the budget is set, and after any significant change in funding.”
The two sentences in that template that most policies leave out are the ones CC19 cares about most: the reasons, written for this charity rather than any charity, and the rule for who decides to use reserves and how that decision is recorded.
Monitoring, reporting and talking to funders
A reserves policy is not a once-a-year paragraph. CC19 says trustees “should review their policy at least annually as part of a charity’s planning processes”, and that “The trustees’ monitoring of reserves should not just be a year-end procedure.” In particular they should “identify when reserves are drawn on so that they understand the reasons”, notice when reserves “rise significantly above target”, ask whether a shortfall is short-term or a sign of a longer problem, and review the annual report statement after a significant change. Reserves “can be invested”, but because they may be needed in the short to medium term trustees “should therefore ensure that reserves are invested in a way can be readily realised as cash, when needed”.
In the annual report, the reserves statement gives the policy, the level held and why; where material funds have been designated, it should “quantify and explain the purposes of these designations” and, for future spending, “the likely timing of the expenditure”. A charity with no reserves, or less than its target, still needs a policy: CC19 says the Commission “still expects such charities to have a reserves policy”, and expects trustees to plan how to raise the funds, diversify income and “mitigate the risks that might arise if the charity has to close suddenly”. Reserves that look too high are usually a reporting failure – “If, for example, a charity is using a standard form of reserves policy wording, it is not likely that it will tell the charity’s story” – or a sign the charity is struggling to spend its funds.
Funders read the policy too. CC19 warns that reserves that look too large may suggest the charity does not need funds, and reserves that look too low may lead a funder to refuse on the basis that the charity is unstable. It asks trustees to show “the reserves held are based on a policy and a clear understanding of what the money is to be used for”, to understand each funder’s policy on applicants’ reserves, and, when fundraising, not to “misrepresent the urgency or need for funds”. Charities with very low reserves facing difficulty are pointed to the Commission’s guidance on improving a charity’s finances (CC12).
The draw on reserves that was agreed by text
Reserves policies are adopted at board meetings, but reserves are usually used between them. The grant instalment is late and the payroll is due on Friday, so the treasurer messages the chair: “OK to move £8k across from the reserve account to cover salaries until the grant lands?” The chair replies with a thumbs-up from a train. In February the finance lead suggests in the trustees’ group chat that £15,000 be set aside for the minibus replacement, and three trustees agree. Both are exactly the decisions CC19 is about: a draw on reserves the trustees must understand, and a designation that changes the free reserves figure in the annual report.
When the annual report is written, and the independent examiner asks when the minibus designation was made, the only evidence that it was made before the year end, rather than “retrospectively after the year end”, is a message on three personal phones. The trustees who agreed may have stood down. The examiner, the Commission or a funder asking why reserves fell below target in October is answered from memory and screenshots.
The question for the next board meeting is a precise one: for each draw on reserves and each designation in the last financial year, can the board show the date it was decided, by whom, and on what authority under the governing document?
Questions people ask
Does a charity need a reserves policy?
Yes: the Charity Commission’s guidance CC19 says all charities need to develop a policy on reserves, and every charity must state its reserves policy, the level held and why, in its trustees’ annual report. A charity without a policy must say so in the annual report, and a charity that decides to hold no reserves must explain that decision there.
How much money should a charity keep in reserve?
There is no set amount: CC19 says there is no single level, or even a range, of reserves that is right for all charities, and that any target “should reflect the particular circumstances of the individual charity”. The target, as a figure or a range, should come from the charity’s own forecasts of income and spending, the reliability of each income source, its commitments and the risks it faces, and the trustees should be able to explain how they reached it.
What makes a good reserves policy?
A good reserves policy, in the Charity Commission’s terms, “fully justifies and clearly explains keeping or not keeping reserves”, is tailored to the charity rather than “just a standard form of wording”, and explains “exactly what reserves are kept (or not kept) for and when they are to be used”. CC19 also expects it to be published, put into operation and reviewed regularly as funding and risks change.
How do I calculate a charity’s reserves?
Calculate a charity’s reserves by starting with its unrestricted funds and deducting tangible fixed assets used in its work, social investments, funds designated for essential future spending, and commitments not provided for as liabilities; that is the CC19 definition. Restricted funds and endowments are not reserves, and group accounts must include the net assets of subsidiaries.
Can a charity have too much in reserve?
Yes: CC19 says reserves “higher than necessary” may tie up money and “unnecessarily limit the amount spent on charitable activities”, and holding income without justification might amount to a breach of trust. Where a charity has more than it needs to fulfil its purposes, CC19 says “the trustees must consider whether the purposes of the charity should be amended”.
Can a charity invest its reserves?
Yes: CC19 says reserves can be invested, but because they may be needed in the short to medium term they should be invested in a way that can be readily turned into cash when needed. For small sums it suggests an interest-bearing account with a UK bank or building society linked to the current account; larger reserves invested more widely, for example in shares and corporate bonds, carry more investment risk and need an investment policy and a clearer analysis of when the money may be needed.
Official guidance and your next step
The primary source is the Charity Commission’s Charity reserves: building resilience (CC19), with Annex 1 for smaller charities and Annex 2 for charities with more complex activities and structures. The Commission’s guidance on preparing a charity trustees’ annual report covers the reserves statement, and the trustees’ wider duties are in The essential trustee (CC3). Charities in Scotland and Northern Ireland should read their own regulator’s guidance.
This guide is a summary for England and Wales, not legal or financial advice. Your independent examiner or auditor can check the calculation against your accounts.
Then do one thing: before the next budget meeting, calculate last year’s free reserves using the CC19 definition, and write one sentence for each reason the charity holds them. If a reason has no number beside it, that is the gap in the policy.
ComplyChat gives a board a channel the charity owns for the decisions taken between meetings, on the record from the first message with everyone in it told so. On paid plans, once the charity’s Microsoft 365 tenant is connected, the lasting record files there under the charity’s own retention rules. It is not accounting software and it does not calculate reserves. We publish this guide because the date a trustee decision was made is so often a message nobody can now produce.
Sources
Every document this guide quotes or links to, in the order it first cites them.
