Can a Charity Make a Profit?

Introduction

It is a common misconception that charities cannot make a profit. In reality, many successful charities do generate surpluses from their activities. The key difference between a charity and a commercial business is not whether they make money, but what they do with it.

A charity’s purpose is to serve the public good, not to enrich private individuals or shareholders. This article explains how charities can make a profit, what the rules are for using it, and how trustees should manage surplus funds responsibly.

Can Charities Legally Make a Profit?

Yes, charities can make a profit, but only if that profit is used to further their charitable objectives. Under charity law, charities can trade, invest, and earn income like any other organisation, as long as the profits are applied entirely to their charitable purposes.

For example, if a homelessness charity runs a café that earns money, it can use the profits to fund its outreach programmes. What it cannot do is distribute those profits to trustees, members, or private investors.

The term profit in a charity context is usually referred to as a surplus. This means the charity’s income exceeds its expenses for a given period. Having a surplus is a sign of good financial management, not a breach of charitable principles.

How Charities Can Generate Profit

Charities can earn income from a variety of sources, including:

• Donations and grants: Money received from the public, companies, or funding bodies.

• Trading activities: Selling goods or services, such as running charity shops, cafés, or ticketed events.

• Investments: Income from property, shares, or savings.

• Membership fees: Regular subscriptions from supporters or members.

• Contracted services: Delivering services on behalf of local councils or public bodies.

As long as the activity supports or funds the charity’s main objectives, any profit made is legitimate.

Primary and Non-Primary Trading

The Charity Commission distinguishes between primary purpose trading and non-primary purpose trading.

Primary purpose trading is when a charity sells goods or services directly related to its aims. For example, an educational charity charging for training courses or a theatre charity selling tickets for performances. Income from primary purpose trading is exempt from Corporation Tax.

Non-primary purpose trading involves activities that are not directly linked to the charity’s main purpose but raise money for it. For example, selling merchandise or hiring out space. In such cases, the charity may have to pay tax on profits unless it operates through a trading subsidiary — a separate company set up to handle commercial activities.

This structure protects the charity’s assets and ensures compliance with tax law. The subsidiary passes profits to the charity through donations under Gift Aid.

Why Profit Matters for Charities

A healthy surplus allows a charity to:

• Build financial reserves for stability and emergencies

• Fund future projects or expansion

• Invest in staff, equipment, or new services

• Improve sustainability and reduce reliance on grants or donations

Running at a small profit each year helps a charity remain resilient, especially during uncertain economic conditions. However, accumulating excessive reserves without clear justification could raise concerns with regulators and donors. Trustees must balance prudence with purpose.

How Profits Must Be Used

All profits must be reinvested in ways that advance the charity’s objectives. Common uses include:

• Funding charitable programmes or services

• Maintaining buildings or equipment used for charitable work

• Paying reasonable salaries for staff who deliver services

• Investing in fundraising or awareness campaigns

• Setting aside reserves for future projects or risks

Charities must not use profits for private gain or political purposes unrelated to their mission. Every financial decision should support public benefit and align with the charity’s governing document.

Reporting Requirements

Charities must report their income and expenditure in their annual accounts and trustee report. The Charity Commission expects full transparency about:

• Sources of income

• How funds are spent

• Reasons for retaining or using surpluses

Trustees should be able to demonstrate that profits are being managed responsibly and used to advance charitable activities.

Example Scenario

Imagine Community Pathways, a registered charity that supports unemployed people through training. It runs a social enterprise café where trainees gain experience.

The café generates £20,000 more in income than it spends. This profit is used to fund new training programmes and cover the costs of equipment. Because the café directly supports the charity’s purpose — providing training and employment opportunities — the profit is considered charitable income, not taxable profit.

If the charity later opens a gift shop unrelated to its main aims, it could be classed as non-primary trading. To stay compliant, the shop would operate as a trading subsidiary, passing profits back to the charity after paying tax.

The Role of Trustees

Trustees are responsible for ensuring that any profit is used appropriately. They must:

• Make decisions in the charity’s best interests

• Keep clear financial records

• Ensure trading activities comply with charity and tax law

• Justify reserves or surpluses in the trustee report

If a charity consistently generates large profits without using them for its stated purpose, the Charity Commission may investigate whether it is acting as a true charity.

Common Misunderstandings

• “Charities cannot charge for services.” In fact, many charities charge fees if this supports their mission, such as museums, care providers, or educational trusts.

• “Profit means the charity is acting like a business.” Charities can operate commercially, provided the motive is to fund charitable work, not to enrich individuals.

• “Surpluses must be spent immediately.” Charities can hold reserves for future needs but must explain the reasoning in their annual report.

How an Accountant Can Help

An accountant with charity expertise can help trustees:

• Separate charitable and trading income

• Set up a trading subsidiary where needed

• Ensure compliance with Charity Commission and HMRC rules

• Prepare transparent financial statements

• Advise on how to manage reserves and surpluses responsibly

Good financial guidance ensures profits are maximised for impact while remaining fully compliant with the law.

Conclusion

Yes, a charity can make a profit — and it often should. Profit, or surplus, is a sign of good financial health and allows a charity to plan for the future. The crucial point is that all profits must be reinvested into charitable activities, not distributed for private gain.

By managing income carefully, complying with tax and reporting rules, and ensuring every pound supports public benefit, a charity can thrive financially while staying true to its purpose.