Setting next year's service charge budget: a guide for resident directors and freeholders
For most blocks, November and December are budget season. The figure the board signs off now will shape every service charge demand for the year ahead, so it is worth getting right. A budget that is set too low leads to a balancing charge and difficult conversations with leaseholders. One that is set too high ties up leaseholders' money without good reason. Here is a practical way for resident directors, RTM companies and freeholders to build next year's service charge budget.
1. Start with the lease
The lease decides what can be charged, when and how. Before looking at any figures, check:
the service charge year and the dates demands are issued;
which costs are recoverable, and how they are split between flats (and any commercial units);
whether the lease allows a reserve fund, and on what terms.
If the lease does not provide for a cost or a reserve, it cannot simply be added to the budget.
2. Build from last year's actual spend, not last year's budget
Rolling last year's budget forward with an inflation uplift is the most common reason budgets drift away from reality. Start instead from what was actually spent, heading by heading, then adjust for anything you already know will change: new contracts, planned works, price increases and one-off costs that will not recur.
3. Focus on the headings that move most
Buildings insurance. Often around a quarter of the total budget. Use the renewal quote where you have it, and check the reinstatement valuation is current.
Repairs and maintenance. The hardest heading to predict. Look at the last two or three years, not just the last one, and allow for the age and condition of the building.
Fire safety and compliance. Fire risk assessment reviews, fire alarm and emergency lighting servicing, electrical testing, water hygiene and lift inspections. In blocks over 11 metres, the Fire Safety (England) Regulations 2022 also require regular fire door checks, so allow for the time and any remedial work.
Contracts. Cleaning, gardening, lift maintenance and communal electricity. Check renewal dates and whether prices are fixed.
4. Plan the reserve fund properly
Where the lease allows it, the reserve fund should be built from a planned maintenance programme rather than a round number. Roofs, lifts, external redecoration and door entry systems all have a lifespan. Spreading those costs over several years avoids large one-off demands when the work falls due.
5. Allow time for Section 20 consultation
Major works costing any leaseholder more than £250, and long-term agreements costing any leaseholder more than £100 a year, need Section 20 consultation before the work or contract goes ahead. If next year's budget includes works of that size, build the consultation timetable into your plans now so the work is not delayed.
6. Sense-check the total
Once the headings are set, compare the total with similar buildings. As a guide, the middle half of budgets in our figures run from around £1,800 to £2,850 per flat a year, depending on the size, age and facilities of the building. If your figure is well outside that range, check you understand why.
Our free service charge budget estimator lets you estimate your building's budget in two minutes, see typical costs per flat and get the line-by-line breakdown.
7. Explain the budget to leaseholders
A clear budget is easier to collect. Issue it with a short note explaining the main changes from last year, and make sure every demand is accompanied by the statutory summary of rights and obligations. Remember the 18-month rule: costs generally cannot be recovered if they were incurred more than 18 months before leaseholders were demanded or notified of them, so keep the budget and the accounts moving together.
How we can help
We prepare budgets from the lease, the actual spend and a planned maintenance view of the building, and we explain them clearly to directors and leaseholders. Estimate your building's budget, or contact the Temphis team to talk about how we can support you and your building.