Restricted vs Unrestricted Funds: Charity Accounting Explained (2026)
Restricted, unrestricted, designated, endowment funds — explained for UK charity trustees. Worked example showing why headline cash overstates flexibility.
Restricted vs Unrestricted Funds: Charity Accounting Explained (2026)
The single most-misunderstood concept in UK charity finance. Restricted funds, unrestricted funds, designated funds, endowment — what each means and how SORP 2026 reports them.
Last reviewed: 06/07/2026 · Written by Ivan Siyanko, CEO, CharityIQ.
TL;DR
– Restricted funds can only be spent on the specific purpose the donor or funder specified.
– Unrestricted funds can be spent on any of the charity’s purposes.
– Designated funds are unrestricted funds that trustees have committed to a specific purpose — but they can change that designation.
– Endowment funds are capital that must be preserved (permanent endowment) or partly spent (expendable endowment).
– SORP 2026 requires clear distinction in the Statement of Financial Activities (SoFA) and balance sheet.
Why this matters
Most charity finance confusion stems from one root: people mix up “money in the bank” with “money we can spend on what we want”. They are not the same.
A charity with £100,000 in the bank may have only £10,000 of unrestricted funds. The other £90,000 is restricted to specific funder purposes — and using it for anything else is a breach of trust, possibly criminal.
Trustees who don’t grasp this distinction can make catastrophic decisions. Funders, regulators, and auditors all care deeply that the distinction is honoured.
The four fund types
1. Unrestricted funds
Money the charity can spend on any of its charitable purposes. These come from:
- General donations (without restrictions)
- Membership subscriptions
- Trading income (charity shop sales, services)
- Investment income
- Unrestricted grants (rare but valuable — see The Fore for an example)
Unrestricted funds are the strategic resource. They give trustees flexibility — including the ability to fund reserves, invest in capacity, or respond to opportunities.
2. Restricted funds
Money restricted by the donor or funder to a specific purpose. Restrictions can be:
- Project-restricted — for a specific programme (e.g., “youth mentoring 2025-26”)
- Income-restricted — for ongoing operating costs of a defined activity
- Capital-restricted — for a specific asset (e.g., “purchase of minibus”)
- Time-restricted — must be spent in a specific period
Sources include:
– Most foundation grants (Henry Smith, Tudor Trust, Esmée Fairbairn — typically restricted)
– Government contracts (delivery of specific services)
– Specific fundraising appeals (e.g., a Christmas appeal for a particular cause)
– Restricted donations (donor specifies the use)
Critical: restricted funds are held in trust for the specified purpose. Spending them otherwise is a breach. Trustees can apply to the Charity Commission for permission to vary the restriction in narrow circumstances, but this is uncommon.
3. Designated funds
Designated funds are unrestricted funds that trustees have committed to a specific purpose. Examples:
- Designated for premises repair (a few years of saving)
- Designated for a future programme launch
- Designated for staff redundancy contingency
Crucially, trustees can un-designate if circumstances change. This is the difference from restricted funds, where trustees cannot vary the restriction.
In the balance sheet, designated funds sit within unrestricted funds but are shown separately so the level of free reserves is visible. Most reserves policies exclude designated funds (see our reserves policy guide).
4. Endowment funds
Endowment funds are capital that’s been given to the charity to be preserved.
- Permanent endowment — capital must be retained forever; only investment income is available to spend
- Expendable endowment — capital can be spent down, but only with trustee authorisation; spending policy applies
Endowments typically come from large donors or legacies establishing a long-term charity. Most small UK charities don’t have endowments. If yours does, the rules around their management and reporting are specific and often need legal advice.
How SORP 2026 reports them
Under SORP 2026, the Statement of Financial Activities (SoFA) shows income and expenditure split between:
- Unrestricted funds (further split between general and designated)
- Restricted funds
- Endowment funds
The balance sheet shows fund balances by type at year-end.
Trustees’ Annual Report narrative must explain:
– Major restricted balances and what they fund
– Reasons for designations
– Any endowment fund management
This visibility is core to charity accounting. A donor or funder reading your accounts can see exactly what’s available for general purposes versus what’s tied up.
Worked example — Riverdale Community Trust
Year-end 2025-26 fund position:
| Fund | Balance | Available for? |
|---|---|---|
| Unrestricted general | £19,200 | Any charitable purpose |
| Designated — premises repair | £12,000 | Earmarked, can be redirected |
| Designated — staff contingency | £10,000 | Earmarked, can be redirected |
| Restricted — Lloyds Bank Foundation Year 1 of 3 | £8,000 unspent | Lloyds programme delivery only |
| Restricted — Henry Smith youth grant | £4,500 unspent | Youth programme only |
| Restricted — community appeal 2025 | £3,000 unspent | Community lunch only |
| Total | £56,700 |
What this means:
– True free reserves: £19,200 (unrestricted general only)
– Designated unrestricted: £22,000 (could be redirected if trustees agree)
– Restricted total: £15,500 (cannot be redirected)
– Headline balance: £56,700 — but this overstates strategic flexibility
For SORP 2026 reserves policy purposes, free reserves is the £19,200 figure (and possibly the £22,000 designated, depending on policy). A funder or auditor reading the accounts must be able to see this clearly.
From CharityIQ. CharityIQ tracks restricted/unrestricted/designated/endowment balances and reports them in your SORP 2026-aware Trustees’ Annual Report. See compliance →
Common mistakes
1. Treating restricted balances as available cash. Charity has £100k in the bank, makes a strategic decision based on that figure, then realises £80k is restricted. Now the strategy is unfunded.
2. Spending restricted funds on overheads. Some funders allow a percentage for overhead recovery; many don’t. If the funder didn’t agree to it, you can’t.
3. Trustees confusing designation with restriction. Designated funds can be moved; restricted funds cannot. Get this wrong and you breach trust.
4. Restricted balances accumulating year-on-year. If you raise restricted funds faster than you can spend them, you accumulate balances that aren’t available for general purposes. Funders sometimes ask why and may withdraw.
5. No end-of-grant reconciliation. When a restricted grant ends, any unspent balance must be returned or formally re-purposed with the funder. Many charities forget this.
Frequently asked questions
Q: Can we earn interest on restricted funds?
A: Yes, generally — but the interest itself is usually treated as restricted to the same purpose, unless the funder has agreed otherwise.
Q: What if a funder restricts our unrestricted donations?
A: Donor restrictions are binding. If a regular donor specifies what their next payment is for, that becomes restricted income. Most general donations don’t carry restrictions — but check.
Q: Can a Gift Aid claim on restricted donations be unrestricted?
A: Generally yes. Gift Aid is HMRC tax relief that arrives separately from the original donation. Most charities treat it as unrestricted unless the donor has specified otherwise.
Q: How does this interact with our reserves policy?
A: Reserves are a subset of unrestricted funds (typically excluding designated). Restricted balances are not part of reserves regardless of size.
Q: What about funder-required programme reporting?
A: Restricted funders typically require year-end reporting on how their funds were used, with reconciliation. Build this into your year-end process.
What to do this quarter
If your charity has multiple funding streams:
1. Reconcile all restricted balances to their original grants
2. Review any designations — are they still relevant?
3. Audit your unrestricted vs restricted ratio — funders look for healthy unrestricted base
4. Update your reserves policy to clarify which fund types it covers
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Written by Ivan Siyanko, founder of CharityIQ.
Related: Charity Reserves Policy SORP 2026 · SORP 2026 Trustee Guide · SORP 2026 Trustees’ Annual Report Template
Sources:
– Charities SORP 2026 — main reference
– Charity Commission — Charities and reserves CC19
– Charity Commission — Accounting templates
– ICAEW — Charities SORP 2026