2025: The year of the 'big squeeze'
Tightening belts and difficult decisions
When we look at the wider economic outlook for the voluntary sector in the next 12 months, it is still very much through the lens of the compounding effects of the covid-19 pandemic, followed by the cost of living crisis and rising inflation.
It is also worth noting the very real risk of further economic ‘shocks’ caused by global volatility. US President Donald Trump recently introduced tariffs on imported goods and services with significant implications for the global economy. There could be several consequences as a result – including potential further inflation, impact on investments, higher costs for consumers, and loss of jobs in some sectors. Charities may see an impact on their investments and their demand for support, particularly if there is a cost of living impact in the UK.
This year it will be ever more important for organisations to be scenario planning consistently to prepare for these moments of change.
Many organisations dipped into their cash reserves to get them through the unexpected financial pressures of the last couple of years – with research showing one in four charities were forced to use reserves during the pandemic. Without scenario planning, many charities will have no choice but to (once again) use precious cash reserves to plug the gap, which could mean charities continue to struggle to bounce back to full strength.
Whilst cost-cutting can reduce overheads, many organisations have already cut back as far as they can, with no more room to make savings. The risk now is that many organisations will need to go further – reducing investment in training and development or wellbeing programmes, which could impact their long-term ability to recruit and retain good talent. This chain of events could end up costing charities more in the long run.
The last few years have hit the sector hard. Crisis after crisis has left charities with no headroom to cope with another. While many charities want to be able to build back their cash reserves, they’re also distracted by the need to keep up with the rising cost of operating. Increases to rents, utilities, staff wage bills, employer National Insurance Contributions and general expenses means every pound they raise has to go further than ever.
This financial squeeze won’t be helped by increases to employer National Insurance Contributions, which were announced in Autumn 2024 and came into effect in April 2025. Without an exemption for the charity sector, NCVO estimates the increase represents an additional financial strain on the sector to the tune of £1.4 billion.
In the absence of being able to pass this cost onto the consumer, as the private sector would, and without the same exemptions the public sector receives, organisations will need to find workarounds to cover this extra cost. This is in addition to increases to the minimum wage, which will increase the overall staff wage bill.
It's likely that this tough economic situation means many charity leaders, and their boards, will be forced to make some difficult decisions. That could include reducing staff levels or restructuring, closing or merging with other organisations, or cutting services, which ultimately impacts the people and communities that rely on them.
Greater competition for funding and fundraising
For more than two decades the general public has been the main source of income for the voluntary sector. But trends on individual giving are changing – which is unsurprising given the current economic climate and pressure on household incomes.
The British public donated an estimated £15.4 billion in 2024 to support charities, according to the Charities Aid Foundation’s (CAF) annual UK Giving Report. However, the number of people donating has fallen to the lowest levels recorded since CAF began its research in 2016.
Technology is impacting the public’s choice to give. Whereas previously people may have taken unwanted items to charity shops, apps like Vinted have made it easier for people to sell items themselves and keep the money. At a time when people are looking for ways to make additional income, selling instead of donating is a compelling offer. This creates a risk for charities who have retail or donation models.
The funder landscape is changing too. Many funders – examples include Lankelly Chase and the Foyle Foundation – are winding down their grant-making activities, with plans to distribute their wealth and assets in the next few years. Other funders have closed to applications and/or are changing their strategy.
Carol Mack, Association of Charitable Foundations (ACF) chief executive, wrote in October 2024: “Grant-making charities and foundations report a stark reality: grant applications have surged by a reported 30–50%, with some foundations seeing their number double. This dramatic increase isn't just about numbers – it represents thousands of organisations desperately seeking support to continue their vital work. One of the foundation sector's key strengths lies in its plurality: there are around 10,000 foundation funders in the UK. While some foundations may pause certain programmes, others maintain or increase their spending. This plurality ensures continued support across the sector, even as individual foundations adapt their approaches.”
Changes to government funding
Income from government made up 26% of the voluntary sector’s total income in 2021/22, compared to 30% of total income in 2020/21. This shows there has been a significant reduction in the proportion of sector income coming from government.
Larger organisations (income over £1m) received the majority of government income, with major and super-major organisations receiving 61% of all government funding.
Charities with an income under £100,000 (which make up 80% of the sector) are more dependent on the government funding they receive than larger organisations. Government funding makes up 37% of all income for micro and small organisations, compared with 26% for all other, larger organisations.
Central government was the largest source of income (48%) in 2021/22, compared to 51% in 2020/21. Local government contributed 44% of all government funding, stable from the previous year’s 43%.
In February 2025, central government issued new guidance for public sector commissioners, requiring them to “maximise procurement spend” with voluntary, community and social enterprise (VCSE) organisations. The Cabinet Office’s procurement policy statement states that all central government departments must set a two-year direct spending target with the VCSE sector by 1 April 2026.
Sarah Elliott, chief executive of NCVO, said at the time:
“It’s encouraging to see the Government set targets to partner with more VCSE organisations to deliver public services in the years ahead. Charities have the expertise and deep community connections needed to deliver essential public services, which is why the sector already delivers over £14bn worth of public services on behalf of government.
However, current contracts are often critically underfunded, and the cost of delivering them continues to rise.
"Without the vital uplifts needed to meet the increased costs, organisations are often forced to subsidise the true cost of delivery using cash reserves and public donations, or hand back contracts all together. It is essential that authorities commit to commissioning charities with the fair and sustainable funding needed to deliver public service delivery ambitions.”
What's clear is that charities must not rely on one revenue source, where possible. Ensuring diverse funding sources will be crucial, especially for smaller charities who are more reliant on government funding.
Finding diverse sources can be difficult though. For example, there is currently a lack of awareness (and some practical barriers to access) among small charities around other funding opportunities, such as social investment, which enables them to take out loans or sell shares to raise capital. To make more charities aware of this funding option, and to overcome some of these barriers, we have developed practical guidance to support them.
Banking is still an issue for small charities
Another challenge for small charities is banking. Over the past few years, we’ve heard from a growing number of NCVO members that it’s becoming more and more difficult to find banking services that meet their needs. Without access to banking services, organisations can’t appropriately manage their finances. This might mean they can’t carry out charitable activities and may fall short of regulatory requirements.
This causes significant stress for those who might be managing finances in a charity, and it poses risks for Boards in being able to meet their financial and legal obligations.
With four in five charities dealing with board vacancies, and over a third (35%) reporting a lack of financial expertise on their board, banking challenges may further deter potential trustees from stepping forward to fill those gaps.
Being sustainable: having a bigger impact, with a smaller environmental footprint
Climate change is one of the biggest threats our society, and planet, will face. As a result, set against the backdrop of the need to do more with less, charities (including those for whom the environment is not their core purpose) will need to think about how they can embed sustainability practices into the way they operate.
As Richard Sagar, Head of Policy at Charity Finance group, says:
It is difficult to think of any charity or social change organisation for which climate change will not either directly or indirectly impact their communities. If the voluntary sector is to maintain moral authority, all parts of it must play a role in moving towards net zero.
A report in 2023 by Charity Digital, exploring charity attitudes to environmental sustainability, found that 94% of sector workers think that charities have an obligation to address climate change. And yet only half said that doing so was included in their strategy. In fact, most charities rate the sector’s efforts in addressing climate change at six out of 10.
Whether it’s a food bank using green vehicles to deliver food, or how they move to automated processes to avoid paper waste, many charities will be looking at how they can meaningfully meet their regulatory, legal and ethical obligations around sustainability. Often, the biggest impact a charity can have is through moving to sustainable suppliers and supply chains to buy the goods and services it needs to operate.
This provides a challenge for those organisations who do not have expertise in this space. Boards first need to understand their environmental footprint to ensure that their strategies incorporate actions that impact on that footprint in a meaningful way. Boards then need to fully understand the risks and identify how to embed meaningful sustainability goals into their organisational strategy, which executive teams can then implement. All this while minimising the impacts on operational costs and continuing to deliver strong outcomes against their core purpose.