Restricted vs Unrestricted Funding for Charities: What You Need to Know

TL;DR: Restricted funding must be spent on a specific purpose set by the funder; unrestricted funding can be used for any activity within a charity's charitable objects. The distinction is not just administrative — it is a matter of trust law, and the Charities SORP requires charities to account for each fund type separately. Many charities struggle with an over-reliance on restricted project grants, which can leave core costs chronically underfunded.

What Is Restricted Funding?

Restricted funding is income given on terms that legally restrict its use to a specific charitable purpose. Spending restricted income on anything else — even another charitable activity — constitutes a breach of trust under charity law. A donor's non-binding preference (for example, "please use this for youth work if possible") is different from a legal restriction; only terms that genuinely bind the charity create a restricted fund.

Restrictions can come from two sources:

• Donor-imposed restrictions — explicit terms set out in a grant agreement, such as "this grant is for the delivery of a youth mentoring programme in Bristol between April 2026 and March 2027."
• Appeal-based restrictions — funds raised through a specific public appeal, where donors reasonably expected their money to go towards a named cause or project.

The Charities Statement of Recommended Practice (SORP), which applies to all charities preparing accruals accounts in England and Wales, Scotland, and Northern Ireland, requires restricted income to be recognised in the Statement of Financial Activities (SoFA) separately from unrestricted income. Any unspent restricted funds at the year end must appear as restricted fund balances on the balance sheet and carried forward until the conditions are fulfilled.

Restricted income funds must be spent within a reasonable period from receipt to further the specific charitable purpose for which they were given. If a funder agrees to release restrictions — sometimes called "de-restriction" — that agreement should be documented in writing.

The Charity Commission's Annual Return 2023 only asks charities with income of £500,000 or more about the funds they hold, and just 13.43% of those eligible charities reported holding any type of fund. Within that reporting group, unrestricted funds were 58.96%, endowment funds 30.19%, and restricted funds 10.85%. This is not a sector-wide split across all registered charities — it reflects the subset of larger charities that were asked the question and reported holding funds. (GOV.UK Annual Return 2023)

What Is Unrestricted Funding — and How Does It Differ from Core Funding?

Unrestricted funding is income that a charity may spend on any activity that falls within its charitable objects. It gives trustees the flexibility to direct resources where they are most needed, including general running costs, reserves, or new initiatives.

The terms "unrestricted funding" and "core funding" are often used interchangeably, but they are not identical:

• Unrestricted funding places no conditions on how the money is spent beyond the charity's own purposes.
• Core funding usually means funding for an organisation's running costs rather than a named project. It may be unrestricted, if given as general support, or restricted, if the grant agreement limits it to specified costs such as salaries, rent, or overheads. The label "core costs" doesn't determine the accounting treatment — the grant terms do.
• Project funding is restricted to the delivery of a named project or defined set of activities.

This distinction matters when reading a charity's accounts. A grant labelled "core costs" by a funder may still need to be shown as restricted income in the SoFA if the grant agreement specifies that it can only be used for overhead.

Unrestricted income is widely regarded as the most valuable type of funding a charity can receive, because trustees can deploy it wherever the need is greatest. Third Sector Trends data suggests that grant-makers became more flexible during the pandemic but have since tightened again: the proportion of third sector organisations receiving unrestricted or core funding rose from 46% in 2019 to 60% in 2022, then fell back to 56% in 2025 (Third Sector Trends in England and Wales 2025). Multi-year and fully unrestricted grants remain a minority practice among UK funders (IVAR, Evidence Review: Why restrict grants?).

Effective AI Grant Management platforms can help charities track which income streams are restricted or unrestricted in real time, reducing the risk of inadvertent fund misuse.

Full Cost Recovery, Financial Management, and SORP Reporting

Full Cost Recovery

Full cost recovery (FCR) is the practice of ensuring that a funded project bears a fair share of the organisation's overhead costs — not just its direct expenses. Direct costs are items specific to a project (for example, a project worker's salary and travel). Indirect costs are shared overheads such as rent, IT, finance, HR, and governance functions.

Many restricted grants do not allow overhead recovery, or allow only a nominal percentage. This creates a structural deficit: the charity delivers the project but subsidises it from its unrestricted reserves. Over time, this erodes financial resilience.

ACEVO and NCVO have both published guidance encouraging charities to build indirect costs into every project budget. Common allocation methods include:

• Staff-time percentage — allocating overhead proportional to the time staff spend on each project.
• Expenditure-based model — allocating overhead as a percentage of total direct expenditure.
• Full-time equivalent (FTE) calculation — dividing shared costs by the number of staff working on a project.

The NCVO Road Ahead 2025 report notes that many organisations drew on cash reserves during recent financial pressures, with research showing one in four charities were forced to use reserves during the pandemic. The resulting lack of financial headroom makes the balance between restricted and unrestricted income more consequential than ever (NCVO, Road Ahead 2025: Challenges).

SORP Accounting Requirements

The Charities SORP (FRS 102) sets out how charities must account for different fund types. Key requirements include:

• Fund accounting — charities must maintain separate accounting records (or clearly distinguishable ledger codes) for each restricted fund, each designated fund, and the general unrestricted fund.
• SoFA presentation — income and expenditure must be presented in columns showing unrestricted funds, restricted funds, and endowment funds for the current year and prior year.
• Balance sheet — total assets and liabilities must be analysed between fund types.
• Notes to the accounts — where a charity holds material restricted funds, the notes must explain the nature of each restriction and disclose any deficit on a restricted fund.

SORP 2026 applies to reporting periods starting on or after 1 January 2026 for charities preparing accruals accounts. It is a major update, not a minor refinement: it introduces a three-tier reporting structure based on charity income, IFRS 15-aligned revenue recognition, on-balance-sheet lease accounting, and revised disclosure requirements. Charities with significant grants, contracts or leases should expect to update accounting policies and systems (Charities SORP).

Accurate fund reporting is also important for grant compliance. Funders increasingly request grant-specific financial statements as part of mid-term or final reporting, and Impact Reporting tools that link expenditure data directly to grant milestones can significantly reduce the time spent preparing these reports.

Frequently Asked Questions

Can a charity move money between restricted and unrestricted funds?

Generally, no. A charity needs a lawful basis to change the use of restricted funds — usually the funder's agreement, but it can also be appeal wording that permits an alternative use, or a charity-law route such as the relevant cy-près process for failed or surplus appeals. If a charity cannot spend a restricted grant in line with its original purpose (for example, because a project has ended early), it should contact the funder to agree an alternative use or arrange a refund. Trustees should document the basis for any change carefully.

What happens if a charity overspends on a restricted fund?

If expenditure on a restricted project exceeds the related restricted income, the deficit must be shown in the accounts. Trustees have an obligation to understand how that deficit arose and to plan how it will be met — typically from unrestricted reserves. A recurring pattern of restricted fund deficits is a red flag in any financial governance review and may attract scrutiny from the Charity Commission.

Is designated funding the same as restricted funding?

No. Designated funds are portions of unrestricted funds that trustees have set aside for a particular purpose by their own decision — for example, a building maintenance reserve. Because the designation is a trustee decision rather than a donor condition, trustees can reverse it. Restricted funds, by contrast, cannot be de-restricted without the original donor's or funder's consent.

Recommended Next Pages

• What Is Grant Management? — An introduction to the end-to-end grant lifecycle and how to manage it effectively.

• Best Grant Management Software UK 2026 — A comparison of leading platforms to help charities and funders choose the right system.

• What Is a Charity Trustee? — Roles, responsibilities, and legal duties of charity trustees under UK law.

• Grant Compliance Guide — How to stay on the right side of grant conditions, from reporting requirements to fund management.

Published by the Plinth Team. Last updated 21 February 2026.