When a charity ends the year with more income than expenditure, the outcome may appear straightforward. In practice, it raises technical, legal and reputational questions.

Language plays a role. So does judgment.

A surplus is not a profit in the corporate sense. It is a reflection of timing, planning or restraint.

Managed well, it can strengthen operations and reinforce trust. Managed poorly, and it may attract scrutiny or create internal uncertainty.

If your charity has a surplus this year, let’s take a look at how to handle it.

Profit vs. Surplus: Why Language Matters

Charities do not make a profit. The term “profit” suggests private gain. However, in a charity, all income must be applied to further the organisation’s charitable purposes. That principle is embedded in UK charity law.

What you record instead is a surplus, a situation where income is higher than expenditure over a reporting period.

Example: If your charity receives £300,000 and spends £285,000, the surplus is £15,000.

The opposite is called a deficit and it reflects that spending has exceeded income.

Neither outcome is inherently good or bad. What matters is how you explain the result and what you do next.

Using the right terminology helps avoid confusion, particularly with funders, beneficiaries and the Charity Commission.

Can Charities Make a Profit? What the Law Actually Says.

Charities in the UK are not barred from earning more than they spend. A surplus is entirely lawful and often necessary. The key issue for trustees is not whether a surplus exists, but whether the activity that generated it aligns with the charity’s purpose and complies with its governing document.

The Charity Commission makes this clear: income-generating activities are permitted if they support charitable aims and if any surplus is reinvested into those aims.

Activities that fall outside the charity’s core purpose may still be valuable, but usually require a trading subsidiary. This protects the charity from tax exposure and financial risk.

Use this comparison to guide decisions:

Permitted within the charity	Requires a trading subsidiary
Ticket sales for a public education event	Online sales of general merchandise
Membership fees linked to charitable services	Regular venue hire for private functions
Sponsored challenge events for fundraising	Retail sales of bought-in goods

You Should Aim for a Surplus

Surpluses are often misunderstood in the charity sector. The word “profit” can feel uncomfortable, as though earning more than you spend conflicts with your mission. It doesn’t. In fact, it shows that your charity is managing resources with care.

A surplus is not a sign of excess. It is a sign of foresight. Without it, your organisation may lack the flexibility to respond to new needs, absorb funding delays, or invest in improvement. Strong reserves help sustain services, support staff, and meet unexpected costs without scrambling for emergency funding.

Trustees have a duty to ensure financial sustainability. That includes budgeting for a surplus where appropriate and reporting it clearly. There is no conflict between delivering impact and building resilience. When a charity plans for the future, everyone benefits, beneficiaries included.

How Do Surpluses Appear?

Even as the gap between charity income and expenditure narrows, many organisations continue to report surpluses. In 2024, total spending across UK charities reached £94 billion, showing sustained activity and rising delivery costs.

Trustees who see a surplus at year-end should not view it as a sign of underinvestment. It reflects timing, funding patterns or effective cost control – all of which require strategic follow-up.

A surplus may arise when:

• A grant is awarded close to the financial year’s end, with delivery scheduled for the following year.
• An event raises more than projected through ticket sales or donations.
• A trading activity performs better than forecast.

Each of these creates a financial position trustees must assess. Is the surplus restricted or unrestricted? Is it part of a longer-term pattern or a one-off? What implications does it carry for reserves and delivery?

Restricted vs Unrestricted Surpluses

Not all surpluses give you the same flexibility. How you can use unspent funds depends on whether they are classified as restricted or unrestricted.

What’s the Difference?

Unrestricted funds give trustees more options. These might come from general fundraising, retail income or investment returns. The board can allocate them to reserves, new programmes or development plans but the rationale must be documented.

How to Report Surpluses Correctly

When your charity finishes the year with a surplus, that figure needs to be reported accurately and explained clearly. This is part of your duty as a trustee. Financial results should show how the charity is managing its funds and how those funds support future plans.

In your accounts, the surplus appears in the Statement of Financial Activities (SOFA). This statement breaks down income and spending and shows whether the result is a surplus or a deficit. You’ll also need to show whether the funds are restricted or unrestricted.

A clear explanation should be included in the trustees’ report. This is your opportunity to explain how the surplus came about and how the charity intends to use it.

Make sure the explanation reflects your reserves policy. Funders and regulators expect to see that you have a plan and that the surplus isn’t being held without purpose.

Practical tip: Use simple wording like:

“The surplus of £22,000 resulted from project funding received late in the year. These funds will be spent on delivery during the following financial period.”

How To Plan for and Apply Surpluses

The next step is to decide how these funds will strengthen delivery and support future plans for your charity.

Start with Purpose

Begin by reviewing the surplus in relation to your reserves policy and financial plan. Look at how the additional income supports your charitable objectives and make sure the board records its decision.

Consider the Options

Surplus income can support a range of priorities. For example, your board may choose to:

• Set funds aside as part of a general reserve.
• Expand an existing programme or pilot a new service.
• Allocate income to a defined project starting next year.

Build a Forward-View

Many boards use a simple three-year financial strategy to track how surpluses will be applied over time. This approach provides a useful structure when explaining your position to funders or supporters.

What to Avoid: Pitfalls in Managing Surpluses

Surpluses can strengthen a charity’s financial position. To do that well, trustees need to stay involved in how those funds are held, reported and applied. A few key areas deserve careful attention.

1. Unallocated Reserves

Holding unrestricted funds without a clear purpose can create uncertainty. Funders and supporters may expect to see how the surplus supports delivery. Make sure your reserves policy explains how unspent income is used to meet future needs.

2. Board Oversight

Surplus decisions should be discussed and agreed upon at the board level. This gives the process accountability and ensures financial planning remains consistent with the charity’s long-term aims.

3. Use of Restricted Surpluses

If your charity raises funds for a specific purpose and receives more than needed, the surplus cannot be redirected without following the correct process. This may involve:

• Using a secondary purpose clause if one exists.
• Seeking donor permission for an alternative use.
• Applying to the Charity Commission for approval.

Planning Matters More Than the Surplus

A surplus shows that your charity is in a position to plan, not pause. What matters is how you use that position to strengthen delivery, build resilience, and maintain transparency. Trustees have a duty to make those decisions clearly, record them properly and report them in a way that supports trust.

If you need support reviewing your reserves policy, reporting surpluses under SORP or setting up a trading subsidiary, we can help. At Charity Accounting Partners, we work exclusively with charities and understand the detail which trustees need to manage – from financial planning to regulatory reporting.

Get in touch for a clear evaluation and practical tips. It’s free!