"How much should we keep in reserves?" is the question trustees ask most and answer worst. Hold too little and you look fragile, one delayed grant from an emergency board meeting. Hold too much and a funder reasonably asks why they should top up a charity already sitting on two years of running costs. There is no universal number. There is a defensible number for your charity, and arriving at it is a trustee duty rather than a finance nicety.

The bar has also just moved. Charities SORP 2026 applies to accounting periods beginning on or after 1 January 2026, and it turns the reserves section of the trustees' annual report from a paragraph of intent into a figure that has to reconcile to the balance sheet. A policy that says "we aim to hold three to six months of expenditure" and stops there no longer clears it.

Reserves are not your bank balance

The Charity Commission's definition in CC19 is narrow and deliberately so: reserves are that part of a charity's unrestricted funds that is freely available to spend on any of the charity's purposes. Getting from your total funds to that figure means stripping out, in order:

  • Endowment funds — permanent endowment cannot be spent at all, and expendable endowment only on the terms of the gift.
  • Restricted income funds — money given for a specified purpose. You cannot spend a youth-work grant on keeping the lights on, so it never counts towards resilience. Our post on restricted and unrestricted funds covers the mechanics of keeping the two apart.
  • Tangible fixed assets used for charitable activities — the building you deliver from, the minibus, the fit-out. It is unrestricted, and it is not spendable without ending the service.
  • Programme-related and social investments, on the same logic.
  • Designated funds set aside for essential future spending, and commitments not already provided for in the accounts.

What survives that list is free reserves. It is almost always a fraction of the bank balance, and it is the only figure a funder or the regulator is interested in.

A worked example: from £680,000 of funds to £182,000 of reserves

Illustratively, take a community arts charity with a 31 March 2027 year end — a period that began on 1 April 2026, so SORP 2026 applies to it. Total funds at the year end are £680,000, and there is £310,000 sitting in the bank, which is the number the board has in its head. Work down properly:

  • Total funds £680,000
  • Less restricted income funds (three project grants) £185,000 → unrestricted funds £495,000
  • Less tangible fixed assets used for charitable activities — the studio fit-out and equipment — £248,000
  • Less a board-approved designation for the roof replacement scheduled in 2028 £65,000
  • Free reserves: £182,000

Against unrestricted expenditure of £492,000 a year, or £41,000 a month, that is 4.4 months of cover. Not the £310,000 in the bank, and not the £680,000 on the balance sheet. Note also that the roof designation has to be explained and quantified in the annual report, with the likely timing, precisely because it is being excluded from reserves. A designation that shrinks the reserves figure without explanation reads as a way of making the number look smaller.

Justify the number from your risks, not from a rule of thumb

CC19 is explicit that there is no single level, or even a range, that is right for all charities. The target has to come from your circumstances. Four tests do most of the work:

  1. Income volatility. How much of next year's income is already contracted or committed, and how much has to be won again? A charity where two grants make up 60% of unrestricted income needs a materially higher target than one funded by 400 regular givers.
  2. Notice. How long between "the funding is stopping" and having to act on it? Grant agreements with twelve months' notice reduce the reserves you need. Rolling contracts terminable at thirty days increase them sharply.
  3. The orderly closure test. If income stopped entirely, what would it cost to wind down responsibly rather than chaotically? For the arts charity above: three months' notice for six staff at £61,000, the remaining lease term and dilapidations at £48,000, statutory redundancy at £14,000 — £123,000. That is a floor, not a target. Reserves below it mean the charity cannot close without leaving somebody unpaid.
  4. Known peaks and troughs. A charity whose largest grant arrives in September and whose costs run evenly needs working capital through August that has nothing to do with resilience.

Three to six months of core running costs is where a lot of charities land, and it is a reasonable sanity check on your answer. It is not the answer. The arts charity's 4.4 months is defensible because £123,000 of it is the closure floor and the rest is roughly six weeks of headroom on a volatile grant — and that sentence, not the ratio, is the policy.

What SORP 2026 now requires you to write down

The revised SORP scales requirements across three tiers set purely by gross income: Tier 1 up to £500,000, Tier 2 from £500,001 to £15m, and Tier 3 above £15m. The reserves requirements bite at every tier. Trustees must now:

  • State clearly what the charity means by reserves, since the word is used loosely elsewhere;
  • Give the reserves figure and reconcile it to the figures in the accounts, explaining every step of the deduction;
  • Explain the amount, nature and expected timing of any designations excluded from the total;
  • Explain why the level held is appropriate — the reasoning, not just the target;
  • Address going concern where reserves are nil or negative, rather than letting the number pass without comment.

Our post on SORP 2026 and the new thresholds sets out the wider changes, including the separate statutory threshold increases in England and Wales that apply to financial years ending on or after 30 September 2026, and the charity accounts guide covers how the accounts themselves are put together.

Every charity reports a policy, whatever its size The requirement to state the reserves policy in the trustees' annual report is not limited to charities preparing accruals accounts. If trustees have decided not to hold reserves, that decision and the reasoning behind it go in the report instead. Charities with income above £500,000 are expected to go further, quantifying total funds, restricted amounts, material designations and commitments with their timing, and comparing the reserves actually held against the policy — with an explanation of what is being done where the two do not match.

Too much is a finding too

An unexplained pile reads badly, and it reads worst to exactly the people you want reading the report. If your free reserves genuinely exceed your risk-justified level, the answer is not to quietly restate the policy upwards to fit. It is a board-approved plan to spend the excess on the mission, expressed as designated funds with named purposes and expected timing, and said plainly in the annual report. SORP 2026 makes future plans mandatory at every tier anyway, so the plan has to be written down regardless. Deliberate and explained beats large and unexplained every time, and it beats a policy that was reverse-engineered from the balance sheet.

What to do at your next board meeting

  1. Take the latest management accounts and work the deduction above, line by line, to a single free reserves figure. Do not start from the bank balance.
  2. Divide it by monthly unrestricted expenditure to get months of cover, and write the number in the minutes.
  3. Cost the orderly closure test — notice periods, lease commitments, redundancy — and treat the total as the floor.
  4. Agree a target range and, critically, the two sentences of reasoning that justify it from your own risks.
  5. Agree what happens if you fall outside the range in either direction, and who reports it to the board.
  6. Check the policy wording reconciles to the accounts, because from your first period beginning on or after 1 January 2026 it has to.

Get the numbers behind the policy

A reserves policy is only as good as the fund analysis beneath it, and that means proper fund accounting rather than a bank balance and an opinion. We produce the fund analysis, work the free reserves figure and the reconciliation SORP 2026 now demands, and give trustees the wording that stands up when a funder reads it closely. See our charity packages, or talk to us.