Unrestricted vs Restricted Funding in Charities: What’s the Difference and Why It Matters

When it comes to funding, not all donations to charities are created equal. For many supporters, the assumption is simple: you give to a good cause and the charity use

s that money to create a positive impact. But behind the scenes, the way funds are allocated can significantly influence how effectively a charity operates.

At the heart of this conversation are two key concepts: restricted funding and unrestricted funding. Understanding the difference between these two types of donations can help supporters, funders and charities themselves ensure that resources are used in the most impactful way.

What is Restricted Funding?

Restricted funding refers to donations that are earmarked for a specific purpose, project or programme. The donor specifies how and where their money should be spent, often linked to a particular campaign or initiative.

Examples of restricted funding:

• A grant awarded specifically to run holiday play schemes for children with disabilities.

• Funding provided for the Saturday Club, designed to offer weekend respite for families.

• Donations raised through specific campaigns to purchase specialist play equipment or sensory resources.

  
  

Pros:

• Gives donors control and visibility over where their money goes.

• Helps fund specific, often high-profile projects that attract public interest.

• Can enable charities to scale specialised initiatives that need focused investment.

  
  

Cons:

• Creates financial constraints for the charity, limiting flexibility.

• May result in a surplus of funds for certain projects while core operational needs remain underfunded.

• Can encourage a project-driven rather than mission-driven culture, which may undermine long-term strategy.

  
  

What is Unrestricted Funding?

Unrestricted funding, on the other hand, is given without conditions or constraints on its use. This money can be directed wherever the charity deems it most needed — whether that’s staffing, operations, innovation, advocacy or even keeping the lights on.

Examples of unrestricted funding:

• General donations made through the PACSO website without specifying a purpose.

• Proceeds from fundraising events like the annual PACSO Ball, where funds can be used flexibly.

• Support from local businesses or community groups who trust PACSO to allocate funds where they are most needed.

  
  

Pros:

• Offers flexibility to respond to emerging needs and crises.

• Helps charities invest in infrastructure, sustainability and staff development.

• Supports long-term strategic planning and innovation.

  
  

Cons:

• Some donors may feel uneasy about giving without knowing exactly where the money goes.

• Less visibility for donors on direct impact, which can affect future fundraising.

• Charities must work harder to build trust with funders to secure unrestricted gifts.

  
  

Why the Balance Matters

For a charity to thrive, a healthy balance of restricted and unrestricted funding is essential. Restricted funds allow charities to deliver the specific services that donors care about, while unrestricted funds provide the essential support to keep the organisation running effectively.

Without unrestricted income, even the most impactful charities can struggle with:

• Covering core costs like staff salaries, rent and insurance.

• Developing new services to meet changing family needs.

• Responding flexibly to emergencies or rising demand.

  
  

This is why many sector leaders advocate for a greater share of unrestricted funding, it’s the fuel that powers sustainable, long-term impact.

How Donors Can Help

If you’re considering supporting a charity, think about the type of donation you’re making:

• Trust the organisation: If you believe in the charity’s mission and leadership, consider making an unrestricted gift.

• Ask questions: If you have concerns about transparency, ask the charity how they use unrestricted funds.

• Balance your giving: It’s okay to fund specific projects that inspire you, but also remember the importance of keeping charities operational.

  
  

Final Thoughts

Restricted and unrestricted funding both play a crucial role in the charity ecosystem. But for a charity to remain resilient, adaptive and impactful, unrestricted funding is absolutely vital. By understanding the differences, donors and funders can make more informed decisions that truly support the long-term health and success of the causes they care about.

If you'd like to make an unrestricted donation to PACSO and help sustain their amazing work, visit: https://www.pacso.org.uk/donate/