Rising costs, reduced funding opportunities and increasing financial pressures are placing significant strain on UK charities. With employer National Insurance Contributions (NICs) increasing, charities must take proactive steps to navigate these financial challenges.
The financial impact of policy changes
The National Council for Voluntary Organisations (NCVO) estimates that the increase in employer NICs from 13.8% to 15% will impose an additional annual cost of £1.4 billion on UK charities. This comes at a time when charities are already grappling with rising demand, escalating costs, and diminishing funding sources.
Following the October 2024 Budget, Sarah Elliott, Chief Executive of the NCVO, remarked: “This is the biggest shock to the sector since the pandemic. Charities already juggling rising demand, escalating costs, and the falling funding cannot absorb an additional £1.4 billion in costs without drastic service cuts. This additional cost, for which there is no headroom in budgets to cover, will be devastating.”
The decision to exempt the NHS from National Insurance increases while leaving charities to shoulder the cost has sparked criticism from sector leaders, with many voicing concerns that the rises will force charities into a precarious position resulting in reductions in staffing and essential services. Even large charities like Marie Curie and Age UK have voiced concerns about the severe impact on their operations.
CFG research following the October 2024 Budget announcement highlighted the gravity of the situation and reported nine out of ten charities had concerns with 80% stating they will need to cut costs.
Building financial resilience
Financial resilience is more important than ever. While we can’t offset the impact of rising costs, here are key areas to focus on to navigate budget constraints while staying true to your mission.
Make sure you understand your finances
Ensuring trustees and management understand your charity’s financial position helps with making informed decisions and implementing effective cost controls. We recommend conducting a thorough review of your charity’s financial health, scrutinising every cost and anticipating future expenses. Be cautious about income, only including knowns and certainties. Be realistic about anticipated expenditure too, including any extra potential costs such as redundancies. Regularly review budgets and cashflow movements to identify potential issues early and adjust strategies accordingly.
Regularly revisit your reserves policy
What is the current level of your charity’s reserves? Not that as stated in your last set of annual accounts signed off by your auditor, but today. If you don’t know the answer to this question, you need to get up to speed quickly.
Your reserves policy must be tailored to the needs of your charity. While there is no fixed rule regarding how much should be held in reserve, reserves that are ‘too high’ can make it look like your charity is not focused on the front line but having reserves that are ‘too low’ can make you look vulnerable or indicate poor planning.
The policy must be flexible enough to adapt to economic changes. Perhaps you decide that, as a minimum, your charity must hold the sum you would need to fund redundancies if you had to close, or perhaps the key figure is the sum to have in reserve should major sources of funding be delayed. Once you have decided on the reserves needed, make sure you communicate your reasoning effectively. Transparency is key; ensure stakeholders understand why reserves are necessary, balancing the need for financial stability with concerns about excess funds.
Consider ways to diversify income streams
Reliance on a single income source is a significant risk. If opportunities exist for new revenue streams, explore these. For example, consider corporate partnerships, grants, social enterprise initiatives, or fee-for-service models. Digital fundraising campaigns or subscription-based models can also attract a broader audience. We recommend engaging all team members, including volunteers, in identifying and testing opportunities.
Anticipate and adapt to demand
Engage with stakeholders and beneficiaries to understand their evolving needs, then forecast changes in service demand and adjust operations accordingly. This might involve scaling back nonessential activities or pivoting to meet emerging needs, ensuring continued relevance and sustainability.
Maximise Gift Aid and tax efficiencies
Gift Aid can be a valuable source of additional income, allowing charities to claim an extra 25p for every £1 donated by UK taxpayers. However, many charities do not fully optimise their Gift Aid claims. Regularly reviewing Gift Aid processes, ensuring donors complete declarations and promoting eligible donations can help maximise income.
Also, it is worthwhile exploring available tax reliefs, including business rates relief and VAT exemptions on certain charitable activities. Reviewing VAT treatment and seeking professional advice on tax efficiencies can result in significant cost savings.
Fixed costs and investments should be reviewed periodically
Where possible, leases, loan terms and supplier agreements should be renegotiated to improve cash flow. For charities with investment portfolios, periodically review strategies to ensure your assets are working effectively. If you have a large portfolio, professional advice should be sought to optimise returns while maintaining a risk profile aligned with the organisation’s objectives.
Embrace innovation and collaboration
Leveraging technology and fostering collaboration can help enhance efficiency and broaden your impact. Explore opportunities for shared service agreements with other charities that have a similar mission or opportunities to collaborate with local businesses or other charities to share resources and reduce costs.
On the tech side, make sure you are making the most of free AI programmes, where relevant. You do not need to be a technology expert to harness some of the AI capabilities already out there. For example, OpenAI chatbots like ChatGPT and Copilot can be used to generate copy or media content, help with grant applications or digest and summarise reports. However, while AI can do a great job of responding clearly to questions, it won't have the same insight as someone from within your charity. Outputs require editing and refinement to ensure any content created aligns with your charity’s tone of voice, complies with legal and ethical standards, and respects copyrights.
Also evaluate the cost-benefit of outsourcing noncore activities. For example, outsourcing functions like payroll, accounting or IT support can improve efficiency and reduce staff costs, allowing your team to focus on delivering mission-critical services.
Engage younger audiences
Younger people are increasingly motivated by social causes and are more likely to engage with charities that align with their values. However, engagement strategies need to be adapted to suit their preferences. Digital storytelling that highlights the tangible impact of donations can be highly effective. Inclusive campaigns that involve younger influencers or advocates could also amplify your message. Additionally, offering skills-based volunteering opportunities tailored to younger supporters can attract new talent while benefiting both the organisation and the individuals involved.
High governance standards remain key
Good governance is essential for financial sustainability and public trust. Recent Charity Commission investigations have reinforced the importance of proactive governance, particularly in relation to financial management, partnerships and safeguarding. Trustees should regularly review governance structures to ensure compliance with the Charities Act 2022 and other regulations. Developing clear policies for partnerships and affiliations will help mitigate reputational risks, while ongoing trustee training ensures that financial oversight and ethical decision making remain strong.
Seek to align investments with ethical and mission-driven goals
The Charity Commission has issued new guidance to help trustees ensure their investment strategies reflect their charity’s purpose. Reviewing investment policies to ensure they align with the charity’s mission and public expectations should be a priority. Environmental, social and governance (ESG) factors should also be considered, alongside financial performance. Professional advice can help strike the right balance between ethical considerations and financial returns.
Financial transparency is a crucial aspect of governance
Instances of financial mismanagement have highlighted the need for trustees to ensure funds are used appropriately and in line with donors’ intentions. Establishing clear financial reporting processes, reviewing internal controls regularly, and publishing detailed annual accounts will help maintain public confidence and demonstrate accountability.
Safeguarding remains a non-negotiable priority
High-profile investigations, such as the Charity Commission’s review of Mermaids, have underscored the importance of having robust safeguarding policies in place. Regular safeguarding audits and risk assessments should be conducted, and all staff and trustees must receive appropriate safeguarding training. Policies should be publicly accessible and reviewed annually to ensure they remain up to date.
Address challenges with a commercial mindset
A commercial mindset is increasingly important in the charity sector. While public donations remain a primary income source, economic conditions influence consumer behaviour. When disposable incomes shrink, donors may give less, making fundraising more competitive. In a crowded market, standing out and clearly demonstrating impact is essential.
Consider your approach to corporate partnerships. Many corporates run their own social initiatives and may not immediately see the value in partnering with a charity. To secure meaningful collaborations, clearly articulate what your charity offers – for example, access to a unique audience, credibility in a particular cause or opportunities for employee engagement.
Proactively engaging with your bank can also help strengthen financial resilience. Understand their requirements and explore potential support options, such as overdrafts or payroll guarantees during short-term cash flow gaps. Diversifying banking relationships can further mitigate risk and enhance financial flexibility.
Embedding financial expertise at a senior level can also foster a culture of commercial awareness across the organisation. A strong finance team can drive cost efficiencies, develop innovative income strategies and implement robust financial management practices – ensuring long-term sustainability.
Seek professional advice early
If your charity is an unincorporated association or trust, you and the other trustees could be liable for its debts. Nobody likes to think that they are in financial difficulty but seeking professional financial advice early can prevent issues from escalating into crises. Trustees have a responsibility to act promptly when financial difficulties arise, exploring viable solutions and implementing effective turnaround strategies where necessary.
Developing a little more of a commercial edge and focus will help your charity prosper in an increasingly competitive market. While the road ahead is uncertain, we are confident the resilience, adaptability and commitment of the sector will ensure that charities continue to serve those who need them most.
Four of UHY’s specialists are appointed to the Charity Commission Interim Manager panel and can advise on the various options available for your charity.
If you would like to speak to any of UHY’s experts about your situation, please get in touch