How much should a parish council hold in reserves?

Reserves are the most misunderstood figure on a parish council's balance sheet. Councils are told they hold too much, or too little, usually by someone working from a half-remembered rule of thumb. And because the money is visible in published accounts, the question tends to arrive in public.

It is answerable. But it needs the two kinds of reserve separating first, because most of the confusion comes from treating them as one number.

General reserve and earmarked reserves

The general reserve is the working balance — money held against the unexpected and against the cashflow gap between precept instalments. It has no assigned purpose. This is the figure the rule of thumb refers to.

Earmarked reserves are amounts the council has set aside by resolution for a stated purpose: the play equipment replacement fund, the election reserve, the cemetery extension, the roof. These are not spare money, and they are not part of the general reserve.

The distinction matters because a council with £60,000 in the bank might have a £15,000 general reserve and £45,000 earmarked across five identified projects — a completely different picture from £60,000 sitting unallocated. If your accounts do not separate the two, that separation is the first job, and it usually resolves the argument on its own.

What the guidance actually says

The commonly cited position is that a council's general reserve should sit somewhere between three and twelve months of net revenue expenditure, with smaller councils generally at the higher end of that range and larger councils at the lower end.

The logic behind the range is worth understanding rather than just quoting. A council with a £20,000 annual budget has very little absolute headroom — one unexpected tree survey or legal fee is a large proportion of its year, so it needs proportionally more. A town council spending £400,000 has more capacity to absorb a shock within its existing budget, so a smaller proportion is defensible.

Why holding too little is the bigger risk

Councils worry about criticism for holding too much. The more serious exposure runs the other way.

A parish council cannot raise money quickly. The precept is set once a year and demanded from the billing authority on a fixed timetable — a council that runs short in September cannot ask for more until the following April. It also receives the precept in instalments, so there are points in the year when the balance is at its lowest by design.

Add to that the events that actually hit small councils: a contested election the council must fund, a tree failing an inspection, a legal challenge, an insurance excess after vandalism, a building repair that cannot wait. Any of these can exceed a thin general reserve, and the only remedies are cutting services mid-year or a sharp precept rise the following year — which is far more unpopular than the reserve would ever have been.

Why holding too much attracts attention

The argument against large reserves is legitimate and worth taking seriously. Precept is money taken from residents. Holding it without a stated purpose is holding money that was raised for services and not spent on them, and both residents and external auditors can reasonably ask why.

The answer is almost never to reduce the amount held. It is to earmark it properly. A council holding £80,000 with no explanation looks like hoarding. The same council holding £20,000 general reserve plus £60,000 earmarked across a resolved list of projects, with target amounts and timescales, looks like it is planning. The money has not moved; the governance has.

Writing the policy

A usable reserves policy fits on one page and covers five things:

• Why the general reserve is held — the specific risks this council faces and the cashflow position between precept instalments.
• The target level — a figure or a range, with the reasoning stated.
• Each earmarked reserve — purpose, target amount, expected timing, and how it is funded.
• What happens outside the range — how a shortfall will be rebuilt and over what period, and how a surplus will be applied.
• When it is reviewed — annually, alongside the budget, with the review minuted.

That last point does most of the work. A reserves policy reviewed and minuted each year, alongside setting the precept, converts the reserves question from an accusation into a decision the council has already taken and recorded.

The external auditor's angle

Reserves themselves are not usually queried. What gets queried is a large movement in balances with no explanation — which is a Box 7 variance question rather than a reserves question, and is answered the same way as any other: cause, amount, evidence. If reserves moved because the council started building a fund for a specific project, say so and cite the minute. Our guide to AGAR variance explanations covers the wording.

The practical sequence

Before the budget round, not during it: split existing balances into general and earmarked; calculate net revenue expenditure for the year; work out where the general reserve sits as a number of months; identify every known future spending need and earmark for it deliberately; write the one-page policy; and take it to full council for approval alongside the budget.

Councils that do this find the reserves question stops being difficult, because the answer already exists in a minute.

Guidance for smaller authorities is set out in the current Practitioners' Guide, which is reviewed annually — check the edition applying to your year.