Restricted vs unrestricted funding: the trust deficit in grantmaking

The debate in brief

Most UK grant funding comes with strings attached. Funders specify what the money can be spent on, require detailed project budgets, and expect reports against those budgets. Charities, in turn, package their work into neat projects that match funder priorities — even when the real need is for salaries, rent, and the unglamorous infrastructure that keeps organisations running.

The case for restricting grants rests on accountability: funders have a duty to ensure money is well spent, and restrictions provide a framework for doing so. But a growing body of evidence, led by IVAR and reinforced by major foundations like Esmee Fairbairn and Lloyds Bank Foundation, suggests the opposite may be true. Unrestricted funding produces better outcomes, stronger relationships, and more honest conversations between funders and the organisations they support. The real question is not whether restrictions improve accountability, but whether the funding system's default preference for restriction is based on evidence at all.

Quick takeaways

The arguments

The case for unrestricted funding

The strongest argument for unrestricted funding is simple: the people running charities know where the money is most needed, and funders do not. As Philippa Charles, then director of the Garfield Weston Foundation, has put it, "Those closest to the issue trying to be solved are the best-placed to design and understand what's needed, and how to adapt and change."

IVAR's research backs this up. In a survey of over 1,200 charities, 88% said unrestricted funding enabled them to do better, more responsive work (Firth et al, 2022). Organisations with unrestricted funding were able to make better strategic choices, respond to changing circumstances, and invest in the capacity they needed to deliver. The proportion of charities receiving some form of unrestricted funding rose from 46% in 2019 to 60% in 2022, suggesting a real shift in practice.

The deeper argument is about honesty. Jan Garrill, former chief executive of Two Ridings Community Foundation, has referenced what a colleague has called "the dance of deceit" — charities repackaging core organisational needs as projects to satisfy funder requirements, while funders pretend not to notice. Unrestricted funding breaks this cycle. As Nigel Woof, a trustee of the William Grant Foundation, has argued: "Restricted funding is a peculiarity of the sector which would be mad in commerce. How can you deliver if you run out of overhead?"

The case for restricting grants

The case for restriction is not trivial. Funders — whether foundations, government, or individual donors — have a legitimate interest in knowing how their money is spent. Restrictions provide a structure for accountability, particularly when funding new or unproven organisations. For institutional funders answerable to their own trustees or the public, being able to demonstrate that funds were used for a specific, agreed purpose is not bureaucracy for its own sake.

There is also a legal dimension. Under the Charities SORP, charities must account for restricted and unrestricted funds separately, and spending restricted income on an unauthorised purpose constitutes a breach of trust under charity law. Funders who restrict grants are, in part, responding to a regulatory framework that treats fund designation seriously.

The accountability argument carries particular weight after high-profile governance failures. When public trust in charities sits at 57% (Charity Commission, 2025), funders face pressure to demonstrate rigorous stewardship. Restriction is the most visible way to do so — even if it is not the most effective.

The middle ground: trust earned over time

In practice, many funders are moving toward a hybrid approach. Lloyds Bank Foundation, for example, shifted from prescriptive project funding to three-year unrestricted grants, having concluded that small charities deliver better outcomes with more flexibility. Esmee Fairbairn Foundation now makes 67% of its grants as unrestricted or core-cost funding (2025). These foundations have not abandoned accountability — they have replaced upfront restriction with ongoing relationships and honest conversation.

IVAR's Open and Trusting Grant-making initiative, launched in 2021, now has over 170 funders signed up to eight commitments around better funding practice. Those funders distributed over £1 billion in grants in 2023-24. The direction of travel is clear, even if the majority of UK grantmaking has yet to follow.

The evidence

IVAR's 2023 evidence review, "Why Restrict Grants?", found that the preference for restricted funding rests on "familiarity, not evidence." This is perhaps the most striking finding in the entire debate: there is no robust evidence base showing that restricted funding produces better outcomes than unrestricted funding. The evidence that does exist points the other way.

UK foundation grantmaking reached a record £8.24 billion in 2023-24 (ACF, Foundations in Focus 2025), growing over 6% in real terms during a period of high inflation. Yet this headline figure masks significant strain. Grant applications surged by 50-60% across the sector in the same period, with some foundations seeing applications double (ACF, Foundations in Focus 2025). Charities are competing harder for funding that often still comes with restrictive conditions.

The NCVO has documented how small charities — those with income under £1 million, which account for the vast majority of the sector — are disproportionately affected by restrictive funding. Many restricted grants do not allow overhead recovery, or allow only a nominal percentage, creating a structural deficit where charities deliver projects but subsidise them from their own reserves. This is not sustainable, particularly when the employer National Insurance Contributions increase from April 2025 added an estimated £1.4 billion in costs across the sector.

One counterintuitive finding: despite growing consensus among sector leaders that unrestricted funding is preferable, the Charity Commission's public trust research (2025) shows that the general public still values visible accountability. The 57% who express high trust in charities may in part be reassured by the perception that donated money is tracked and ring-fenced. The sector's direction of travel may be ahead of public expectation.

Current context

The funding environment in 2025-26 is making this debate more urgent. NCVO has described 2025 as "the year of the big squeeze," with charities caught between rising costs, increased demand, and an uncertain funding landscape. Several major funders have recently exited the landscape — Lankelly Chase is redistributing all its assets and closing by 2028, and the Foyle Foundation completed its planned spend-down and closed in December 2025. Those that remain are facing unprecedented volumes of applications.

Against this backdrop, the Charities Act 2022 introduced modest but meaningful changes to the handling of restricted funds, giving trustees greater flexibility to repurpose funds where the original restriction has become impractical. The cy-pres provisions now allow charities to apply proceeds from failed appeals to related charitable purposes without obtaining a formal scheme, though Charity Commission consent remains required for amounts over £1,000 — a recognition that inflexible restrictions can outlive their usefulness.

IVAR's Open and Trusting initiative continues to grow, with 170 funders now committed. But multi-year and unrestricted funding remain minority practices across the sector as a whole. The aspiration is clear; the reality is still catching up.

Last updated: April 2026

What this means for charities

For charity leaders, this debate has immediate practical implications. Organisations that depend heavily on restricted project funding should be clear-eyed about the hidden cost: every grant that does not cover its full overhead is being subsidised from somewhere, usually unrestricted reserves that are themselves finite.

Trustees and finance teams should be able to articulate the true cost of delivering each funded project, including the proportion of core costs it consumes. The full cost recovery conversation is not separate from the restricted funding conversation — they are the same conversation.

Charities also have agency in shaping funder behaviour. IVAR's research shows that funders who switch to unrestricted models often do so because grantees asked them to, and because the resulting relationships were more productive. The "dance of deceit" only continues if both parties keep dancing. Organisations that can make a confident, evidence-based case for unrestricted funding — demonstrating impact, financial literacy, and strong governance — are more likely to secure it.

The sector is moving, slowly, toward a more trust-based model. Charities that understand both the opportunity and the accountability expectations that come with it will be better positioned as the landscape continues to shift.

Common questions

What is unrestricted funding?

Unrestricted funding is a grant or donation that the receiving charity can spend on whatever it judges most useful — salaries, rent, technology, reserves, or any combination. Unlike restricted grants, which specify an approved project or purpose, unrestricted income gives charity leaders the flexibility to direct resources where the need is greatest. It is sometimes called core funding or general operating support.

Why do funders restrict grants?

Funders restrict grants primarily for accountability reasons: restrictions provide a visible framework for demonstrating that money was spent on an agreed purpose. There is also a legal dimension — the Charities SORP requires charities to account for restricted and unrestricted funds separately, and spending restricted income on an unauthorised purpose constitutes a breach of trust under charity law. For institutional funders answerable to trustees or the public, restriction is the most legible form of stewardship, even if it is not the most effective.

What is the "dance of deceit" in charity funding?

The "dance of deceit" — a phrase attributed to a colleague of Jan Garrill, former chief executive of Two Ridings Community Foundation — describes the tacit performance that sustains the restricted funding model: charities repackage core organisational needs (staff costs, overheads, reserves) as discrete projects to satisfy funder requirements, while funders pretend not to notice. Both parties play along because the system demands it. Unrestricted funding breaks this cycle by removing the incentive to misrepresent what the money is actually for.

What is trust-based philanthropy?

Trust-based philanthropy is a funding approach built on the premise that funders should trust grantees to make good decisions about how resources are used. In practice it involves multi-year unrestricted grants, lighter reporting requirements, and ongoing dialogue rather than upfront restriction. IVAR's Open and Trusting Grant-making initiative, which had over 170 UK funders signed up as of 2024, is the main framework for trust-based practice in the UK. Lloyds Bank Foundation and Esmee Fairbairn Foundation are among its most prominent UK proponents.

Should funders give unrestricted grants?

The evidence suggests yes, as a default. IVAR's 2023 evidence review found no robust evidence that restricted funding produces better outcomes than unrestricted funding — and significant evidence that it produces worse ones, including structural deficits, reduced responsiveness, and the organisational distortions of the "dance of deceit." Restrictions can still be appropriate for new or unproven relationships, or where there are specific legal requirements, but the starting position should be flexibility rather than constraint.

Key sources and further reading

• "Why Restrict Grants?" Evidence Review — IVAR, March 2023. The most thorough examination of the evidence base for restricted vs unrestricted funding. Found that restriction rests on familiarity rather than evidence.

• "The Holy Grail of Funding: Why and How Foundations Give Unrestricted Funding" — IVAR and Pears Foundation, November 2021. Case studies from 12 foundations that have moved to unrestricted models.

• "Making the Case for Unrestricted Funding" — IVAR, May 2023. A briefing for foundation staff and boards arguing that unrestricted funding should be the default, with restrictions requiring justification.

• Foundations in Focus 2025 — Association of Charitable Foundations (ACF), 2025. Annual data on UK foundation grantmaking, reporting the record £8.24 billion distributed in 2023-24.

• The Road Ahead 2025 — NCVO, 2025. Annual sector outlook describing the "big squeeze" facing charities from rising costs, increased demand, and changing funder behaviour.

• Public Trust in Charities 2025 — Charity Commission for England and Wales, 2025. Research on public attitudes to charity accountability and trustworthiness.

• Open and Trusting Grant-making — IVAR, ongoing. The hub for IVAR's initiative with 170+ funders committed to better funding practices, including unrestricted funding.

• Charities Act 2022: Restricted Funds Provisions — Various legal commentaries including Price Bailey and Blake Morgan, 2023-24. Analysis of the new flexibility for managing restricted funds under the updated legislation.