Service Charge Budget: What to Include Before the New Financial Year

A service charge budget is not an accounting exercise. It is the document that decides what leaseholders can lawfully be asked to pay in the year ahead, and it is the first thing a tribunal reads if that payment is later disputed. Most of the budgets we take over are built by copying last year's figures and adding a percentage. That method survives right up until someone asks a question you cannot answer from the spreadsheet.

Here is what a defensible budget for a UK block or estate actually needs to contain before the new financial year starts.

Start with the lease, not last year's spreadsheet

Three things in the lease govern the whole budget, and all three are worth re-reading annually rather than assuming:

Can you demand in advance at all? Payment on account is only lawful if the lease provides for it. A minority of older leases do not, which means the landlord funds the year and recovers in arrears. Budgeting for advance payments under a lease that does not permit them creates an unenforceable demand.

What is the apportionment? Fixed percentages, rateable value, floor area and "a fair proportion determined by the surveyor" all behave differently. Where schedules exist — a block schedule, an estate schedule, a lift schedule that only serves certain cores — the budget must be built in those schedules from the start, not apportioned afterwards.

Does the lease permit reserve fund contributions? A large number of leases are silent on reserves. Collecting into a sinking fund without express authority is not a technicality; it is money demanded without a contractual basis.

The compliance schedule that has to be funded

Statutory obligations are the part of a budget that cannot be trimmed to hit a target figure. For a typical residential block that means a current fire risk assessment and a funded line for its actions, fixed wiring and emergency lighting testing, water hygiene and legionella controls, lift examinations under LOLER, gas safety where applicable, and asbestos management where the building predates 2000.

The common failure is not omitting the assessment. It is budgeting for the assessment and not for the works it will recommend. An FRA that generates £14,000 of remedial actions in a block with no provision for them forces a supplementary demand mid-year, which is both unpopular and avoidable.

Section 20: the thresholds decide your timetable

Two figures set the entire consultation calendar under section 20 of the Landlord and Tenant Act 1985:

£250 — qualifying works where any single leaseholder's contribution exceeds this amount require full consultation.

£100 — a qualifying long-term agreement, meaning any contract of more than twelve months, requires consultation where any single leaseholder pays more than this in an accounting period.

Both thresholds bite per leaseholder, not per block. In a building of eight flats a £2,100 job crosses £250. Consultation runs to a statutory timetable of notices and observation periods, so a project identified during budgeting in November is a project that can start in spring. One identified in March is not. Failing to consult caps recovery at £250 or £100 per leaseholder unless the tribunal grants dispensation under section 20ZA — and dispensation is discretionary, not a formality.

Budget season is when the year's qualifying works are identified and the notices are diarised. That is its real function.

Building safety costs: what you can and cannot recover

Schedule 8 of the Building Safety Act 2022 removed whole categories of cost from the service charge for qualifying leases in relevant buildings — a self-contained building containing at least two dwellings that is at least 11 metres high or has at least five storeys. A qualifying lease is broadly a long lease of a single dwelling granted before 14 February 2022, where the flat was the leaseholder's only or principal home or they owned no more than three UK dwellings.

Where Schedule 8 applies, the removal or replacement of unsafe cladding cannot be charged to qualifying leaseholders at all. Neither can remediation of a defect for which the landlord or an associated person is responsible, nor the legal and professional costs of establishing that liability. Where the landlord group's net worth exceeds £2 million per relevant building, it meets the contribution condition and cannot pass remediation costs through either. For non-cladding remediation that does remain recoverable, contributions are capped annually at one-tenth of a permitted maximum ranging from £10,000 to £100,000 depending on property value and location.

A budget that includes a remediation line without first testing it against Schedule 8 is demanding money the leaseholder may be entitled to refuse. Two 2026 changes are worth noting but do not affect existing blocks' budgets: the Building Safety Levy commences on 1 October 2026 and falls on new development, and the second staircase requirement for new residential buildings at or above 18 metres has a transition deadline of 30 September 2026.

Reserves: forecast, don't guess

A reserve contribution invented as a round number is the line most often challenged. The defensible version starts from a condition survey or a planned preventative maintenance schedule with dated cycles — roof coverings, external redecoration, lift replacement, entry systems, boiler plant — an estimated cost at today's prices, and an annual contribution derived from the remaining life. Where the fund is held under section 42 of the Landlord and Tenant Act 1987 it is trust money, which also means it should be visible as a separate balance rather than absorbed into working capital.

Getting the demand itself right

A correct budget can still produce an unenforceable demand.

Under section 21B of the 1985 Act, every demand must be accompanied by the prescribed summary of rights and obligations; if it is not, the leaseholder may lawfully withhold payment until it is supplied. Under sections 47 and 48 of the 1987 Act the demand must state the landlord's name and address and an address in England or Wales for service of notices — without a section 48 address, the service charge is treated as not due. And under section 20B, costs incurred more than eighteen months before a demand are irrecoverable unless the leaseholder was notified in writing within that window that the costs had been incurred and would be charged.

We wrote about the accounting side of this in more detail in our guide to transparency in service charge accounting.

What issuing the budget does not achieve

Approval by a residents' meeting, a board resolution or a majority of leaseholders does not make a cost reasonable. Section 19 requires that costs are reasonably incurred and that works are of a reasonable standard, and section 27A allows the First-tier Tribunal to determine payability — including for sums demanded in advance, before they are spent. A budget is a forecast that has to be justified, not a decision that has been made.

A working timetable

Four to five months out: review the lease terms, obtain the condition survey position, identify qualifying works, and begin section 20 notices for anything crossing the thresholds.

Three months out: tender or benchmark the main contracts, confirm the insurance renewal position, and set reserve contributions from the maintenance schedule.

Six to eight weeks out: circulate the draft with assumptions stated line by line and invite comment. Consultation that happens before the figures are fixed changes the tone of the year.

Before the year starts: issue demands with the section 21B summary, the section 48 address and the correct apportionment schedule applied.

How Temphis approaches this

We take on ten to fifteen properties a year, which is deliberate: it is the number at which a budget can be built from the lease and the building rather than from the previous managing agent's file. Our fees are published in full at standard fees, and what is included in the management service is set out under block management. If you are considering a change of agent, transferring block manager explains how the handover works, and right to manage covers the route where leaseholders take control themselves.

To discuss a budget for the coming year, get in touch.