How to Set a Service Charge Budget for Your Building

How to set a service charge budget for your building

If you're involved in running your building — whether as an RMC director, a leaseholder who self-manages, or someone who's just taken on Right to Manage — one question comes up quickly:

"How much should we actually be charging everyone?"

For most people, the answer is some version of guesswork. You look at last year's spending, add a bit, divide it between flats, and hope it's enough. But a poorly set service charge budget is one of the most common causes of financial stress in self-managing buildings. Too low and you run out of money mid-year. Too high and residents start questioning every decision. And if you've never done it before, it's genuinely hard to know where to start. This guide walks through exactly how to build a realistic, defensible service charge budget for a small block — step by step, in plain English.

What is a service charge budget?

A service charge budget is simply a forecast of all the costs involved in running and maintaining your building for the year ahead, divided between leaseholders. Every leaseholder pays a share of these costs — usually set out in the lease — and that's their service charge. The budget determines how much each person pays. Get it right and the building runs smoothly. Get it wrong and you're either constantly chasing shortfalls or fielding complaints about overcharging.

Under the Landlord and Tenant Act 1985, service charges must be reasonable and services must be of a reasonable standard. That means your budget should be based on actual costs and genuine forward planning — not a number you've arrived at casually.

Who sets the service charge budget? In a self-managing building, it's typically the directors of the Residents' Management Company (RMC) or RTM Company. If you use a managing agent, they'll usually draft the budget for your approval. Either way, leaseholders are entitled to request a summary of costs and to inspect supporting invoices and receipts.

Step 1: Start with your core fixed costs

Fixed costs are the ones you know you'll have every year regardless of what else happens. These are your starting point because they're predictable and non-negotiable. For most small blocks, these will include:

• Buildings insurance — legally required and usually the largest single cost
• Communal electricity — lighting, entry systems, lifts if applicable
• Cleaning of communal areas — hallways, staircases, entrance
• Gardening and grounds maintenance — if applicable
• Fire safety checks — fire alarm servicing, emergency lighting, fire door inspections
• Lift maintenance contract — if your building has a lift
• Accountancy or company secretarial fees — if you use an accountant
• Building management software or admin costs

Get actual quotes and invoices for all of these. Don't estimate from memory — contact your insurer, your cleaning contractor, your fire safety company and get the real numbers.

Buildings insurance tip: Don't just auto-renew. Get at least two or three quotes each year. Insurance is consistently the area where small blocks overpay the most, and the savings from switching can be significant — sometimes hundreds of pounds per year.

Step 2: Add your variable maintenance and repair costs

This is where most budgets go wrong. People either underestimate ("we didn't spend much last year") or ignore it completely ("we'll deal with it if something breaks"). Neither approach works. Buildings always need maintenance. The question is whether you've budgeted for it.

When building this part of your budget, ask two questions:

• What do we typically spend on maintenance each year? (Look at the last two to three years if you have records)
• What might reasonably come up this year that didn't last year?

Common maintenance items that get forgotten:

• Roof repairs and gutter clearing
• External door and lock repairs
• Communal lighting replacements
• Plumbing issues in shared pipework
• Redecoration of communal areas
• CCTV or entry system maintenance

A useful rule of thumb for small blocks: budget at least £150–£250 per flat per year for routine maintenance and repairs. For older buildings or those with known issues, budget higher.

It's always better to slightly overestimate and return surplus to leaseholders than to come back mid-year asking for more money. If you're not sure who's responsible for certain repairs, our guide on who is responsible for repairs in a leasehold property explains the key distinctions.

Step 3: Build a reserve fund contribution

This is the step most small blocks skip — and the one they most regret.

A reserve fund (sometimes called a sinking fund) is money set aside for large, infrequent works that you know will eventually be needed but can't predict exactly when. Think:

• Roof replacement or major roof repairs
• External decoration and repointing
• Major structural repairs
• Lift replacement
• Communal heating system replacement

Without a reserve fund, when one of these comes up — and they always do — you have two options: ask every leaseholder for a large one-off payment (deeply unpopular and sometimes unaffordable), or delay essential work and let the building deteriorate. A reserve fund avoids both. Even a modest monthly contribution per flat, accumulated over years, gives you the financial buffer to handle big repairs without a crisis.

How much should you contribute to the reserve fund?

There's no single right answer, but a reasonable starting point for small blocks is £25–£50 per flat per month — so between £300 and £600 per flat per year. For older buildings or those approaching major works, you'd want to contribute more.

Ideally, you'd commission a professional reserve fund study — a surveyor assesses the building, identifies likely future works, and tells you how much you need to set aside. For a 6-flat block this might cost £500–£800 but can save many times that in the long run.

Step 4: Work out how costs are split between flats

Once you have your total annual budget, you need to divide it between leaseholders. There are two main approaches:

Equal split

Each flat pays the same amount. This is the most common approach in small blocks and the simplest to administer. If your total budget is £8,340 and you have 6 flats, each pays £1,390 per year.

Percentage split based on the lease

Some leases specify that costs are divided according to the floor area or value of each flat. A larger flat might pay 20% of shared costs while a smaller one pays 10%. If your lease specifies a percentage, you're legally required to use it.

Always check your lease before setting apportionment. If the lease is silent or unclear, equal split is usually the safest default — but get legal advice if you're unsure, especially before significant works.

A worked example: 6-flat block budget

To make this concrete, here's an illustrative annual budget for a typical 6-flat Victorian conversion in the UK. Figures are approximate and will vary depending on your location, building age, and specific circumstances.

| Item | Annual cost | Per flat (6 flats) | | Buildings insurance | £1,800 | £300 | | Communal electricity | £600 | £100 | | Cleaning (communal areas) | £1,200 | £200 | | Gardening | £480 | £80 | | Fire safety checks | £360 | £60 | | Routine maintenance / repairs | £1,500 | £250 | | Accountancy / admin | £600 | £100 | | Reserve fund contribution | £1,800 | £300 | | Total | £8,340 | £1,390 / year |

This gives each flat an annual service charge of around £1,390, or just under £116 per month. In London this would likely be higher; outside major cities it could be lower. The key is that every line item has a real basis — not a guess.

Common service charge budget mistakes to avoid

After speaking to leaseholders across the UK who self-manage their blocks, the same mistakes come up repeatedly:

Not reviewing the budget annually

Costs change every year — insurance goes up, maintenance contractors raise prices, inflation affects everything. A budget that was right three years ago is almost certainly wrong today. Review and reissue your budget every year before the new service charge year begins.

Underestimating maintenance

"We didn't spend much last year" is not a budget. Historical spending is a useful guide but buildings are unpredictable. Always include a contingency — typically 10–15% of your total maintenance estimate.

No reserve fund

If your building has no reserve fund and a major item fails — the roof, the lift, the drains — every leaseholder faces a sudden large bill. This creates disputes, financial hardship, and sometimes delayed repairs. Start contributing to a reserve fund even if the amounts feel small at first.

No transparency with residents

Leaseholders have a legal right to request a summary of service charge costs and inspect receipts. But beyond the legal minimum, transparency builds trust. Share your budget with all residents at the start of the year and update them when significant unplanned costs arise. Buildings where residents understand where money is going have far fewer disputes.

Mixing reserve fund money with operating funds

Service charge money — especially reserve fund contributions — must be held in a separate trust account. Mixing it with other money is not just bad practice, it can be a legal breach.

Setting the service charge demand incorrectly

Service charge demands must comply with specific legal requirements under the Landlord and Tenant Act 1985, including being accompanied by a summary of leaseholder rights. Demands issued incorrectly may be uncollectable. If in doubt, use a solicitor to issue your first demand.

Step 5: Issue the budget and service charge demands

Once your budget is finalised, you need to issue it to leaseholders. This usually happens annually — either at the start of the service charge year or shortly before. The demand itself must include:

• The amount payable
• The period it covers
• The name and address of the landlord or management company
• A summary of leaseholders' rights and obligations (required by law)

Most leases specify when service charges are due — quarterly or annually in advance is most common. Check your lease for the exact payment schedule.

Step 6: Track actual spending against your budget

Setting the budget is only half the job. Once the year is underway, you need to track what's actually being spent against what you planned.

This matters for two reasons. First, if spending is significantly higher than budgeted, you need to know early so you can take action — whether that's issuing a supplementary demand or deferring non-urgent work. Second, your actual spending data from this year becomes the foundation for next year's budget. Without tracking, you're always working in the dark. With it, your budgets get more accurate and more defensible every year.

What records to keep: At a minimum: all invoices and receipts, bank statements for service charge accounts, a running log of what has been paid and when, and a year-end reconciliation showing budget vs actual. These are required by law and must be available for leaseholder inspection.

What to do if your service charge is challenged

Leaseholders have the right to apply to the First-tier Tribunal (Property Chamber) to determine whether a service charge is reasonable. This can happen if individual leaseholders dispute the amount charged, the quality of services, or whether the correct process was followed. The best protection against a challenge is documentation: a properly prepared budget, competitive quotes for major contracts, invoices for all expenditure, and clear communication throughout the year. If your charges are reasonable and you can evidence them, a tribunal challenge is unlikely to succeed. If a challenge is made, don't ignore it. Take legal advice promptly.

Where Proppa comes in

Managing a service charge budget manually — across spreadsheets, emails, bank accounts and paper invoices — is genuinely difficult. Things get lost. Transparency suffers. Disputes follow. Proppa is being built specifically to make this manageable for small self-managing blocks:

• Build and share your service charge budget in one place, visible to all residents
• Track spending against budget throughout the year in real time
• Store all invoices, receipts and contracts in one organised document library
• Separate reserve fund tracking so your sinking fund is always clearly visible

No more spreadsheets passed around by email. No more residents asking where the money went. Just a clear, structured way to run your building's finances — built for blocks of 3 to 15 flats.

Frequently asked questions

How often should we set a service charge budget?

Every year, ideally before the start of your service charge year. Issue your budget to leaseholders at the same time as (or just before) your service charge demand. Reviewing it annually keeps costs realistic and gives residents advance notice of what they'll be paying.

Can we charge more than the budget if costs exceed it?

It depends on your lease. Some leases allow interim or additional demands during the year; others don't. If your actual costs significantly exceed your budget, you may need to issue a supplementary demand — but check your lease and take legal advice before doing so.

What happens to surplus money at the end of the year?

Any surplus from the operating budget is typically credited to leaseholders' accounts or carried forward to next year. Reserve fund money should always be retained in the reserve account — it belongs to the building, not to individual leaseholders.

Do we need a professional to prepare our service charge budget?

Not necessarily, though a chartered surveyor or specialist managing agent can be helpful for larger buildings or where there are complex cost-sharing arrangements. For smaller blocks, a well-prepared budget with proper documentation and quotes is usually sufficient. The key is that your charges are reasonable and evidenced.

What is a Section 20 consultation and when does it apply?

Section 20 of the Landlord and Tenant Act 1985 requires you to consult leaseholders before carrying out works where any individual leaseholder's share would exceed £250. This involves a formal notice process giving leaseholders the opportunity to comment and nominate contractors. Failing to follow it can limit how much you can recover through the service charge.

Can a leaseholder refuse to pay the service charge?

Leaseholders are legally required to pay service charges set out in their lease, provided the charges are reasonable and properly demanded. If a leaseholder refuses to pay, you can apply to the First-tier Tribunal to determine the charge is payable, and then pursue recovery through the courts.

How much should we hold in our reserve fund?

There's no fixed legal requirement for the size of a reserve fund, but the general principle is that it should be sufficient to cover anticipated major works over the next 10 to 20 years. A reserve fund study by a chartered surveyor is the most reliable way to determine the right level. At a minimum, you should be contributing something — even a modest amount — rather than nothing.