What counts as a restriction?

Any condition imposed by the donor that limits how the money may be spent. The restriction can be in the application, the offer letter, the donation form, or a clearly expressed verbal commitment. If a donor's intent is clear, the funds are restricted, regardless of formality.

Can we move money between restricted and unrestricted funds?

Generally no. Restricted funds may only be spent on the purpose for which they were given. The narrow exceptions (donor permission, court approval for very small amounts, schemes of release for impractical restrictions) require process and usually professional advice.

How should we report restricted fund balances?

Separately in the SOFA (Statement of Financial Activities) and in the trustee narrative report. Trustees should understand by fund, not just in aggregate. Restricted reserves that look healthy in total can hide an unrestricted shortfall that puts the charity at risk.

Restricted vs Unrestricted Funds Explained for UK Charities

The single most common cause of charity finance trouble is misunderstanding restricted funds. The plain explanation, the practical implications for budgeting and trustee decisions, and the policies that prevent later problems.

An uncomfortable proportion of UK charity finance trouble traces back to one misunderstanding: that all money sitting in the bank account is equally available to spend. It is not. Some of it is restricted by donor intent and may only be spent on the purpose for which it was given. Misapplying restricted funds is a regulatory breach. Reporting them poorly to trustees is a governance failure that often precedes the first one.

The mechanics are not complicated. The discipline is. What follows is the plain explanation that staff and trustees both need, with the policies that prevent the predictable problems.

The three fund categories

Unrestricted funds

Money the charity may spend on any of its charitable purposes within the objects in its governing document. Includes general donations, most trading income, untargeted grants and Gift Aid. The most flexible category.

Restricted funds

Money that may only be spent on a specific purpose named by the donor at the point of giving. A grant for a Bradford youth programme, a community appeal for a new minibus, a major-donor pledge for a research fellowship: all restricted to those purposes.

Endowment funds

Capital intended to be held in perpetuity (permanent endowment) or for a long period (expendable endowment), often with the income spent on charitable activity. Rarer in small charities, but consequential where present.

Each category is accounted for separately and reported separately. The SORP (Statement of Recommended Practice for Charities) sets the framework; the Charity Commission expects compliance.

Where the trouble starts

Three patterns that recur in charity-finance casework:

A restricted grant for one project is used to pay a payroll shortfall on another. Resolved by repaying the restricted fund from later unrestricted income, but a serious regulatory issue if it surfaces.
A trustee meeting is shown a single reserves figure that masks an unrestricted deficit. Decisions are made on the wrong information.
A donor restricts a gift verbally at an event and the restriction is never recorded. The money is spent as unrestricted, the donor later asks for a report, and the gap is uncomfortable to explain.

All three are preventable with discipline at the point of receiving the gift and accuracy in the trustee reporting.

The discipline at the point of gift

Record the restriction in writing, immediately

Every donation, grant or pledge captured with a note on whether it is restricted, the purpose of the restriction, the conditions attached, and the period over which it may be spent. The CRM and finance system must agree on this record.

Train fundraisers to recognise restrictions

Major donors and funders often express restrictions casually. "I'd love this gift to support the work in Liverpool you mentioned." That sentence creates a restricted fund. Fundraisers who recognise it can capture it correctly; fundraisers who do not can create accidental misapplications.

Use a fund register

A single spreadsheet or report that lists every restricted fund, its purpose, its opening balance, its movements and its closing balance. Updated monthly. Reviewed at every finance subcommittee.

The discipline in budgeting

Budget each restricted fund as its own line. Restricted income may only fund restricted expenditure of the same purpose. A budget that nets restricted and unrestricted activity together misleads trustees about the charity's actual financial position.

Unrestricted reserves should be reviewed against the reserves policy, not against the total fund balance. A charity with £400,000 of restricted reserves and £20,000 of unrestricted reserves is not a charity with £420,000 of liquidity.

Reporting to trustees

Four numbers per fund, in every quarterly board pack:

Opening balance for the period.
Income received in the period.
Expenditure in the period.
Closing balance, with a short narrative on whether the fund is on track.

Plus a clear summary of unrestricted reserves against the reserves policy. Trustees should be able to see, at a glance, whether unrestricted reserves are within the agreed range and whether any restricted fund is overspending or significantly underspending.

The harder cases

Underspent restricted funds

If a project is delayed or descoped and the restricted fund will not be fully spent, contact the donor. Most accept a variation request and either extend the period, broaden the purpose, or accept partial spend. Doing nothing is the wrong answer; spending the residue on a different purpose without permission is a breach.

Restrictions that have become impractical

Occasionally a restriction becomes impossible to fulfil (the named programme has closed, the named geography no longer exists, the named partner has dissolved). The Charity Commission's scheme provisions allow a formal release, usually with professional support. The charity may not simply reclassify.

Cost allocation between funds

Shared costs (premises, finance team, IT) may be allocated across funds on a defensible basis. Document the basis, apply it consistently, and review annually. Auditors will examine it; trustees should understand it.

Restricted funds are not a finance technicality. They are a promise to a donor. Charities that treat the discipline as administrative paperwork eventually break the promise; charities that treat it as donor trust rarely do.

The trustee questions worth asking quarterly

What is our unrestricted reserves position, and how does it compare to policy?
Are any restricted funds materially behind or ahead of planned spend?
Have we received any new restricted gifts that change our cost-base commitments?
Have we communicated with donors about any underspends or scope changes?

The 30-day improvement plan

Week 1: Reconcile every restricted fund to its source documentation. Identify any informal restrictions not yet recorded.
Week 2: Build or refresh the fund register. Agree the cost-allocation basis with the auditor in advance of year-end.
Week 3: Redesign the trustee board pack to show fund-by-fund balances and the unrestricted reserves position separately.
Week 4: Brief staff fundraisers on recognising and recording restrictions correctly at the point of gift.

Thirty days. Modest investment. The single best protection against the most common cause of charity finance trouble. Worth doing before it is forced on you.

Restricted vs Unrestricted Funds, Explained Properly