Your school’s reserves policy – time for a review?

Reserves are the unrestricted funds that are freely available to spend on any of the school’s purposes.

VAT on school fees is at the forefront of strategic discussions at schools, with governors debating the level of VAT that can be passed onto parents and the potential impact on pupil numbers. 

Now in 2025, with the numbers crunched, forecasts prepared, and the potential impact on pupil recruitment and retention being understood, schools should consider the impact on reserve levels and the reserves policy. It may be necessary to revisit these in light of the current challenges faced. 

It has always been important for schools to review their reserves policy on an annual basis, ensuring the policy reflects the free reserves held and the future strategy of the school. At a time of significant economic and political uncertainty facing the sector, a well-thought-out reserves policy is now more important than ever.

A clear message to stakeholders

Reserves are much more than a statement about the financial health of your school. A robust reserves position will send a clear message to parents and other stakeholders that you are well-led, well-managed and well-run. 

While it may be true that many independent schools invest their surpluses back into school facilities and, as such, do not generally have excessive free reserves, this does not mean that schools should neglect creating a robust reserves policy or seek to build up reserves. Ultimately, it is up to the governors to work out how much your school needs to keep in reserves. A balance must be struck. Too little, and you could be exposed to shifts in pupil numbers. Too much, and questions could be asked about whether your fees are too high or if you are managing resources in the best interests of the current pupils.

As charities, independent schools must publish and implement a robust reserves policy that sets out a target level of reserves and a plan for how to achieve it.

Governors must consider the expectations of stakeholders and how to effectively communicate with them. Parents, banks and other lenders, alumni and potential donors, and the Charity Commission will all have an interest in the school’s reserves strategy and levels. 

With the changes in VAT, financial resilience will help independent schools stay flexible and adaptable to the impact of these costs, including considerations of fee increases and passing costs onto parents. 

As fee rises due to VAT changes take effect, there may not be an immediate fall in pupil numbers, but it remains to be seen how these changes will impact the already existing challenge of parental affordability. 

A largely fixed cost base and large staff bill make it difficult for schools to quickly reduce outgoings in response to falling income. Equally, funds may be needed at short notice to fund unexpected building repairs. 

Developing an effective reserves policy for your school

The starting point is to calculate your school’s existing level of reserves. It is important to have a clear understanding of your current reserves composition and the total free reserves.

Reserves show the financial strength of your school. But they do not just reflect how much money you have in the bank. Instead, they are the unrestricted funds that are freely available to spend on educational activities, after allowing for funds tied up in fixed assets and future spending plans. The Charity Commission sets clear guidelines on what you should and shouldn’t include in your calculations. Restricted income and endowment funds are excluded. Amounts earmarked for essential future spending and tangible fixed assets that are held for the school’s own use are also excluded.

Building an effective school reserves policy

With a clear understanding of the available reserves, you can now start to compile the reserves policy.  This should cover general reserves, restricted funds, designated funds, target levels, and strategy. The policy should have clear links to the school’s future plans, forecasts and going concern position.

The policy will need to be adapted and evolve over time, reflecting the changing circumstances of the school and the impact of external factors. The Charity Commission recommends that the policy is reviewed at least annually, but individual schools may need to look at it more regularly during periods of change or uncertainty.

It is good practice to review the amounts held in reserves during the year as part of your financial reporting process, as well as at the year-end.

Linking the reserves policy to strategy and forecasts - building projects

A school embarking on a significant boarding house construction will have this as part of their strategy and financial forecasts.

The budget for the project will include detailed costs, cashflows, and decisions made around funding, either from reserves or external borrowing. As the project plans are developed, the reserves policy will need to be considered, using the budget to identify where cashflow requirements deplete reserves over the period. The policy should set out the impact of the project on reserve levels.

If the project is either in part or fully funded from reserves, trustees may wish to consider setting aside funds to support the project. Therefore, the structure of reserves may change over time with the creation of a designated reserve for the construction project.

Linking the policy to external factors

Another way we see reserves policies changing over time is the creation of designated funds within reserves to support external challenges faced by a school. As part of the school’s planned approach to the impact of VAT on fees, you may consider setting aside additional funds to support further bursaries for pupils. 

Many schools already have such funds to support pupils whose parents or sponsors cannot afford the fees, but given the increasing pressures on affordability with the addition of VAT, further or new designated funds are likely to be seen across the sector.

Designating funds

The decision to designate funds should be minuted by trustees in the year in which the designation is made. The financial statements, reserves policy and notes to the financial statements should explain the purpose of the fund, the amount of the designation and when the funds set aside are likely to be spent.

Setting target levels for school reserves

The policy will include a target level of reserves, taking into account the school’s financial forecasts and strategy. This target is tailored to your school’s individual needs. It may be made up of a number of elements to address aspects of the strategy and forecasts.

The policy may include a number or a target range and refer to the rationale for holding reserves.

After consideration of the current reserves (the starting point), the strategy, and forecasts, there may well be a gap between what is held and what is required to achieve the future plans (the target). The policy should then explain what steps are being taken to bridge that gap.

Financial reporting – the financial statements

Finally, the school’s trustees’ report must include the reserves policy. The Charities SORP FRS 102 sets out what should be included in the review of reserves within the report. Alongside the review of the reserves policy, we recommend revisiting the SORP requirements for disclosures and comparing the school’s disclosures to the bullet points included under paragraph 1.48.

Critically evaluate the stated policy against the requirements of the SORP. The disclosures in the trustees’ reports of many schools typically state what reserves are held and the level of free reserves. Improvements can be made around explaining the rationale for holding those reserves, setting target levels, and outlining plans to address any shortfall against those targets.