Something is changing in the UK's third sector. Over the past few years, we have seen charities close, CICs dissolve, organisations merge and others reduce the services they provide. At the same time, new charities, CICs and social enterprises continue to be created by people who identify a need and want to do something about it.

It would be easy to describe this simply as a funding crisis, but the picture is more complicated. The economics of running an organisation have changed, costs have increased and expectations around governance and compliance have grown. The funding environment has changed too. Taken together, these factors raise some important questions about whether the models we have relied upon are still sustainable.

The national figures give us some indication of the scale of the challenge. The Charity Commission's 2026 Sector Risk Assessment found that around 41% of charities spent more than their income in 2024.[1] That does not mean that 41% of charities are in financial difficulty. There are perfectly legitimate reasons for spending reserves in a particular year, but the figure does tell us something about the financial pressures within the sector.

This matters particularly because most charities are relatively small. Of the charities submitting annual returns for 2024, 61.57% reported income below £100,000.[2] For an organisation of that size, losing a grant or contract, facing an unexpected staffing cost or absorbing significant increases in rent, insurance or other running costs can have a substantial impact.

Demand has not disappeared

The financial pressure on organisations is happening at a time when the need for many of their services remains high. Charity Commission research found that 9% of people had received food, medical or financial support from a charity during the previous year, compared with 3% five years earlier. Over the same period, the proportion of people saying they had donated to or raised money for charity fell from 62% to 48%.[3]

Organisations therefore find themselves being squeezed from several directions. Staffing, premises, technology, insurance and professional support all cost more, while organisations are also expected, quite rightly, to meet appropriate standards in safeguarding, financial management, data protection, employment, governance, fundraising and reporting.

These are not optional extras. They are part of running a responsible organisation, but they require people, time and money.

We need to understand what services really cost

One of the longstanding challenges in the third sector is the distinction between funding an activity and funding the organisation that makes the activity possible. A grant might pay for a worker to deliver a service, but somebody still needs to process their payroll, supervise them, provide suitable systems and ensure that the appropriate insurance and safeguarding arrangements are in place.

Similarly, funding might pay for sessions with beneficiaries without contributing sufficiently towards bookkeeping, governance, management, IT, monitoring or reporting. These costs are sometimes described collectively as overheads, which can make them sound separate from the "real" work of an organisation. In reality, they are part of the cost of delivering that work properly.

Funders and commissioners have a role to play by recognising the full cost of delivering services, but organisations also need to understand their own costs. Securing funding for a project does not automatically mean that an organisation can afford to deliver it. If the funding covers the visible delivery costs but leaves the organisation absorbing everything else, growth can actually make the organisation less financially secure rather than more sustainable.

Social enterprise needs a slightly different conversation

There is a related issue within social enterprise. In some parts of the sector, becoming a social enterprise, and particularly becoming a CIC, has become closely associated with accessing grant funding. Grants certainly have an important role, but they are not the defining feature of social enterprise.

A social enterprise exists to achieve a social purpose through an enterprising approach. Grant funding can help an organisation start, test an idea, purchase equipment, develop a service or subsidise provision for people who could not reasonably pay the full cost themselves. There will also be services where trading alone is unlikely ever to meet the full cost of achieving the intended social impact.

The problem is not the use of grants. The problem arises when grant funding becomes the business model rather than one part of it.

The latest Social Enterprise UK research provides some useful context. Its 2025 State of Social Enterprise survey found that the median social enterprise generated 75% of its income from trading, with 71% generating more than half of their income in this way. At the same time, half of the social enterprises surveyed were using grant funding.[4]

This is an important distinction. Social enterprise does not have to mean choosing between trading and grants. A sustainable model may contain both, alongside contracts, donations, subscriptions or other sources of income. What matters is understanding how the organisation will generate sufficient income to continue delivering its social purpose.

Starting a CIC is not the same as building a sustainable organisation

The growth in Community Interest Companies has been significant. At March 2025 there were 37,081 CICs on the register across the UK, and 8,376 new CICs were approved during 2024/25, the highest annual number since the structure was introduced. During the same year, however, 3,832 CICs dissolved.[5]

Dissolution should not automatically be interpreted as failure. Organisations close for many reasons, and the number of new CICs continues to exceed the number leaving the register. Nevertheless, the figures should encourage us to think about what happens after an organisation is incorporated.

Establishing a CIC is relatively straightforward. Developing a sustainable social enterprise is much more difficult.

Too often, the starting conversation is about which grants are available to a new CIC. There is nothing wrong with wanting to understand the funding landscape, but other questions need to come first. What will the organisation provide? Who needs it? Who will pay for it? What will it cost to deliver? Is there sufficient demand? What happens when the first grant ends?

These are not questions that undermine social purpose. They are the questions that help determine whether that purpose can be sustained.

It is also important to distinguish between the beneficiary and the customer. The person receiving a service may not be the person paying for it. A social enterprise might work with children while selling its services to schools, support disabled people through services commissioned by a local authority, or provide community activities funded through a combination of participant fees, contracts and grants.

There are many possible models, but there still needs to be a model.

Being entrepreneurial should not be uncomfortable

The third sector can sometimes have an uneasy relationship with commercial language. Words such as sales, margins, customers and surplus can seem at odds with organisations that exist primarily to achieve social good. In reality, financial sustainability and social purpose are not opposing ideas.

Generating a surplus allows an organisation to build reserves, invest in staff, replace equipment, develop services and respond when something unexpected happens. An organisation that continually generates only enough income to meet its immediate costs has very little room to deal with change.

Social entrepreneurs therefore need to be entrepreneurial. They need to understand their market and their costs, price services appropriately, identify opportunities, sell what they do and understand their financial information. They also need to be prepared to change or stop an activity when there is no realistic way of funding it sustainably.

None of this diminishes the social purpose. Financial sustainability is what gives an organisation the opportunity to continue pursuing that purpose.

The funding system has a part to play

It would be unfair, however, to place all of the responsibility on charities and social enterprises themselves. The funding environment can encourage behaviours that do not necessarily support long-term organisational sustainability.

There can be funding available to create a new project while an existing service that has demonstrated its value struggles to secure continued support. Restricted grants can pay for delivery without making a sufficient contribution towards the infrastructure required to manage that delivery. Organisations can consequently find themselves managing several successful funded projects, each with different timescales, restrictions and reporting requirements, while the organisation holding those projects together remains financially fragile.

Funders understandably want to know what their money will achieve, and organisations should be accountable for the funding they receive. However, sustainability requires us to consider the organisation as well as the individual project.

Perhaps we also need to change some of the support offered to people establishing social enterprises. Helping someone identify suitable grant programmes can be useful, but support with developing services, understanding markets, pricing, sales, contracts and financial planning may ultimately be more important.

The question should not simply be, "What funding can we apply for?" It should also be, "How will this organisation become sustainable?"

Closure is not necessarily failure

The sector also needs a more mature conversation about organisations coming to an end. We celebrate new charities, CICs, projects and funding awards, but we are much less comfortable talking about closure.

The Charity Commission reported an increase in voluntary removals from its register from 688 in 2023/24 to 938 in 2024/25.[1] There will be many different reasons behind those figures, just as there are many reasons why CICs dissolve.

An organisation does not have to exist indefinitely for it to have achieved something worthwhile. Needs change, funding changes and communities change. Sometimes another organisation can deliver the work more effectively. In other circumstances, two organisations might achieve more by merging rather than maintaining separate governance, management and infrastructure.

There will also be occasions when an organisation simply no longer has a viable financial model. Recognising that early enough to manage a responsible closure is preferable to continuing until there is no money left, staff cannot be paid and trustees or directors are forced to make decisions in a crisis.

Closing an organisation does not erase the difference it made while it existed.

A sector that is changing shape

The third sector is not disappearing. People continue to establish charities and CICs, communities continue to organise and the need for organisations capable of responding to social problems remains considerable.

What appears to be changing is the environment in which those organisations operate. Financial resilience matters more, the true cost of delivering services cannot be ignored, and organisations may need to become more comfortable with collaboration, shared infrastructure, different income streams, mergers and, sometimes, planned closure.

For charities, this means having realistic conversations about the cost of delivering their work and building sufficient resilience to manage change. For funders and commissioners, it means recognising that sustainable services require sustainable organisations.

For social enterprise, there is an additional challenge. We need to make sure that in our enthusiasm for social purpose we do not lose sight of enterprise. Grants can be an important part of the funding mix, particularly where services create social value that cannot realistically be recovered entirely through trading, but grant funding cannot compensate indefinitely for the absence of a sustainable model.

Social purpose explains why an organisation exists. A sustainable financial model gives it the opportunity to continue doing the work.

Perhaps, then, the question is not simply whether the third sector is shrinking. The more useful question may be whether we are prepared to change how we build, fund and support organisations so that they are fit for the environment in which they now have to operate.

Sources

[1] Charity Commission for England and Wales (2026), Charity Sector Risk Assessment 2026. Published 18 August 2026.

[2] Charity Commission for England and Wales (2026), Annual Return 2024 analysis report.

[3] Charity Commission for England and Wales (2025), Charities supporting three times as many people with essential aid, research finds, as sector faces increased financial pressure. Published 8 July 2025.

[4] Social Enterprise UK (2025), State of Social Enterprise 2025: Backbone of Britain.

[5] Office of the Regulator of Community Interest Companies (2025), Community Interest Companies Regulator Annual Report 2024 to 2025.