About… Payout rates

Is a mandatory payout rate a way to maximise funds to charities and ensure public benefit? Or a blunt instrument that will constrain strategic philanthropy?

There has been increasing debate in recent years about the need to introduce mandatory payout rates for foundations in the UK, mirroring requirements in some other countries such as the USA, Canada and Australia. A payout rate is the ratio of distribution, generally through grantmaking, of assets by foundations – but there is no shared definition of what should be included in this ratio.

Currently, UK foundations operate without a legally defined minimum for annual expenditure, leaving spending decisions to the discretion of their trustees within the charity regulator requirements to demonstrate public benefit. While this autonomy is seen by some as crucial for effective long-term stewardship, others argue that a mandatory rate could unlock substantial funds for pressing social needs.

In this blog, we will use the 2025 edition of UKGrantmaking, with data up to the 2023-24 financial year, to:

• Review effective mechanisms for calculating the payout rate with UK data
• Identify current foundation practice
• Explore the range of payout rates
• Consider factors that drive the rates

A mandatory payout rate can feel like a simple way to increase charitable giving. However, our analysis presents some real challenges due to the diversity in how foundation assets are structured, and in their approaches to distributing funds. Instead, we propose a disclosure in annual reports – so that foundations report on their payout rate in a similar way to how charities report on their reserve levels. This would support greater transparency, accountability and intentional practice, and could increase average payout rates in a more strategic way.

The Debate

Charitable foundations in the UK play a vital role in supporting a wide range of causes, from arts and culture to social welfare and medical research, from small grants to individuals to multi-million pound grants to large institutions. Some of these organisations hold substantial endowments, the income from which is used to fund their charitable activities. UKGrantmaking shows trusts foundations contributed over £8 billion in 2023-24 in funding to communities and good causes through grants alone, with further contributions made through social investments, loan finance and other philanthropic initiatives. But would a mandatory payout rate unlock more resources?

Arguments for…

Advocates argue that introducing mandatory payout rates would increase funds distributed and ensure more consistent charitable spending by foundations. They suggest that even a modest rate, such as 3% to 5%, could inject millions more into the charity sector annually, providing vital support to organisations and communities. This could enhance accountability, ensuring foundations actively use their resources for their stated charitable objectives and the public benefit, rather than accumulating wealth indefinitely. Furthermore, proponents argue that current societal challenges demand a more immediate response, and a mandatory rate could compel foundations to contribute more actively to addressing these needs now.

…and against…

Critics argue that payout rates are a blunt instrument. There is great diversity within the UK foundation and philanthropic investment landscape, and a “one-size-fits-all” approach would be inappropriate and potentially detrimental to maximising effective philanthropy. Comparing grantmaking and investments in a single year risks limiting more strategic and multi-year giving, and confining the growth of social and impact investments which have been viewed as a positive development in recent years. A strict spending rate could prevent foundations from using their endowments creatively, for example, by making social investments that may not generate immediate returns but could have a significant long-term social impact. Some worry about the erosion of endowments, particularly during economic downturns or periods of poor investment performance, which could jeopardise a foundation’s long-term ability to make grants. A fixed rate could reduce the flexibility and might disincentivise philanthropic innovations. Moreover, there are solutions to dormant foundations through regulator powers: the existing framework, overseen by the Charity Commission for England & Wales, OSCR and the Charity Commission for Northern Ireland, provides oversight to prevent the unreasonable accumulation of assets. A set rate risks a race to the bottom – in countries that have minimum rates, distribution is generally close to those rates even during periods when markets are yielding higher returns.

Method of ratio calculation

In order to introduce a mandatory payout rate in the UK, there would need to be an agreed and effective way of calculating it. Having analysed the US model and explored the challenges of replicating it in the UK (see appendix for additional background), it’s clear that there is no perfect data available to calculate the ratio. 

With that caveat in mind, and after analysing the range of different options with the data available and reflecting on the patterns of strategic grantmaking and changes to context, the figures we have used for the purpose of this analysis are:

This approach considers a longer-term and more strategic approach to philanthropy by taking Charitable Activities rather than just grantmaking, to include social investments and other philanthropic activities, and is more inclusive of organisations that might make larger multi-year commitments but not give grants each year. It would also smooth the market fluctuations of a snapshot year-end assets value in a single year by looking at a longer time frame, and reflects all assets and liabilities and not just investments, to provide a fairer overall picture. This longer-term average would also reduce skews of organisations that may distribute investment gains from the previous year, which a simple in-year ratio does not reflect.

Analysis of current practice

Using the model above, we analysed the foundations in UKGrantmaking 2025 where we had data available for Charitable Activities and Net Assets for 2021-22, 2022-23 and 2023-24 to produce the three-year averages. We looked at all family and general foundations and then focused on the largest 100 by asset values.

The high averages when we look at all those with assets over £1m reflects that there are a high proportion of foundations that still have active donors, or sources of income outside their investments and asset returns.

The averages mask the overall picture. The next chart orders foundations by the level of their average payout rate, and it illustrates the pattern of spread more clearly. More than half distribute between 3% and 6%, with a slow climb at the beginning and a rapid increase for the 10 with the highest rates.

While the average is over 5%, 29 in the group distributed below 3%. This is worthy of further exploration to ensure that some are not failing in their public benefit duties – although, as outlined in the next section, there are other factors that impact these rates.

Whether establishing a minimum payout rate on all organisations would increase distributions over the long-term is unclear. Analysis in UKGrantmaking of endowment level trends shows that with these average payout rates, the endowment levels have been flat in real terms over recent years. The evidence is, therefore, ambiguous as to whether more could be distributed without impacting future giving. For example, in Canada the minimum rate was reduced from 4% to 3.5% in 2005 due to erosion of endowment values impacting future income.

Outliers

It is worth exploring the reasons why some organisations might have rates outside the typical range to understand the practice – and for those at the lower level, the implications of a mandatory payout rate.

Some organisations hold assets in a form with lower returns, that does not generate significant income proportional to the valuation of the asset. For example, a foundation that has been endowed with a working farm may have a high asset value for the valuation of the land, but the margins from this work are relatively small and unlikely to consistently reach income of over 5% each year to sustain a higher payout rate. It may be distributing the maximum that it is able to, but still be unable to meet a mandatory payout rate. The farm is also an illiquid asset, as it is difficult to sell a small part of it to generate short-term income to distribute more grants.

Similarly, organisations may be structured in a way that they have limited control over the assets on the balance sheet and are only able to spend the income or dividends from the assets. For example, the largest 100 foundations by assets included a large foundation distributing around 1% of its endowment, but when explored further, it has a very restrictive Trust Deed defining the capital of the foundation and preventing it from changing the investment portfolio or expending any of the endowment. The grantmaking is the maximum that it could be. A smaller proportion of the remaining asset is held by the family. Introducing a mandatory payout rate or additional requirements risks deterring new philanthropists from putting a proportion of the family assets into a foundation in a similar way.

For foundations unable to take a Total Return approach to their investments, reduced assets that provide healthy dividends in recent decades, as outlined in the Total Return blog, will also have an impact on the potential payout rates.

Some of those with the largest asset values with payout rates of 3% to 5% included social investments and other forms of loan finance or blended finance as part of their activities and portfolios. This impacts the ratios by having assets on the balance sheet which are not for income generation, while also reducing the amount of the grantmaking and charitable activities where social investments might be made over long periods of time and not represented in the annual expenditure in the statutory accounts.

These factors are certainly not the case for all foundations, and there are some with lower payout rates without such restrictions that could be encouraged to review their practice to consider the public benefit requirements in periods where the economic environment supports higher returns.

At the other end of the scale, several grantmakers had significantly higher rates than the 3% to 6% which was typical. For example, several foundations distributed a higher proportion as part of spend down plans. Others had higher ratios as there were active donations adding to the assets.

Some organisations were relatively consistent in their payout rates between years and others were varied, either responding to new income, or in some cases their strategy included larger multi-year strategic grantmaking rather than grants awarded every year. The following chart shows the distribution between the years.

It is important to note that these are the foundations which are registered as charities, that we have data for, and that have been operating for some time. One of the potential consequences of increased regulation of foundations might lead to philanthropists not using the charitable structure, using less transparent structures such as Donor Advised Funds, or deciding not to give at all.

Proposed approach

Given the diversity of the sector, and the nature of philanthropic activities as seen in this analysis, we believe it’s worth considering an annual disclosure – either voluntary, or mandatory – that encourages foundations to explain the rationale for their distribution level, rather than setting a blanket percentage rate.

This disclosure could replicate the form of the reserves disclosure in SORP – especially as often the reserves disclosure is not relevant for many foundations. For example:

The foundation should explain any policy it has for deciding the proportion of assets/endowment to use as charitable expenditure during the year, and the rationale for this approach. It should include:

• The actual proportion of assets used as charitable expenditure during the year
• Explain any material differences to the proportion in the previous year
• Compare the proportion with the foundation’s policy and explain, where relevant, what steps it is taking to bring the amount into line with the level identified by the trustees as appropriate given their plans for the future activities of the foundation.

This would still require an agreed definition for assets, but would allow for more nuance and description of the scenarios referenced above.

Conclusion

The debate over introducing a mandatory payout rate for charitable foundations in the UK is complex, with valid arguments on both sides. The debate highlights a tension between the desire to maximise the immediate impact of charitable funds and the need to ensure long-term, strategic philanthropy; or the need to address dormant or ineffective foundations, while not impeding those who are already looking to maximise their impact, or discouraging potential future philanthropists. Any decision on a mandatory payout rate would require a careful balancing of these competing priorities, considering the unique characteristics of the UK charity sector and the potential consequences for both foundations and the causes they support. The drivers of effective and better quality grantmaking and funding also need to be considered, alongside percentage rates.

We hope this exploration of the data and practice supports an understanding of the nuance in the UK context and enables more informed debate. We believe that a disclosure could provide a way forward without the limitations of a set rate. This would support greater transparency, accountability and intentional practice, and could increase average payout rates in a more strategic way.

We’re continuing to develop and evolve UKGrantmaking with each annual edition, so please do share your feedback and ideas for future development, and sign up to 360Giving’s newsletter for updates.

Appendix – exploring issues with calculating ratios

In order to introduce a mandatory payout rate in the UK, there would need to be an agreed and effective way of calculating it.

Defining a robust method for the calculation is not a straightforward task. The United States model, which is often quoted by proponents of a mandatory rate, does not translate well to the UK context.

The US model

In the USA, the payout requirement is driven by the Inland Revenue Service regulations (IRS) because there is no equivalent of the Charity Commission, and because tax reliefs are a much bigger part of giving, which means payout rates are a way to manage tax.

When the US government grants a private foundation (one that has a single or family donor) tax-exempt status, it expects the foundation to use its money to do good for society. To make sure that happens, the government requires the foundation to spend at least part of its assets each year for charitable purposes. That rule is called the payout requirement. Foundations pay that amount in the form of qualifying distributions, most of which will be grants. Within certain limits, the administrative cost of making grants also qualifies. Generally, a private foundation must meet or exceed an annual payout requirement of 5% of the average market value of its net investment assets to avoid paying taxes.

When calculating this minimum distribution, a foundation can also include grants carried over from previous years and tax payments. For major projects, it is possible to set aside amounts for up to 60 months if IRS requirements are met. While these elements provide some measure of flexibility, the consequences of noncompliance are serious. A foundation will be subject to a 30% excise tax on the undistributed amounts, and an additional 100% tax applies if the foundation is notified and still fails to correct the deficiency within 90 days. Overall, a fairly complex architecture is required to provide for calculation, some moderate flexibility, and enforcement.

Applying to the UK

There are several challenges in translating this model to the UK context.

1. There isn’t a definition of “private foundation” in the UK – so it is unclear who the requirements would apply to. Our regulatory framework is different with the majority of foundations formed as registered charities, and as such, are regulated through a need to demonstrate public benefit, not through a tax regime. In the development of UKGrantmaking, it has been a challenging and laborious process to identify and categorise foundations, and we have sometimes found there is a blurred line between foundations and charities. For the purpose of this analysis we have used the UKGrantmaking categories.
2. The figure used for the calculation in the US is for grantmaking with administrative costs. While this is available in the full statutory accounts in SORP (grants with support costs), it isn’t part of the annual return and isn’t recorded in the same way by all foundations, depending on other forms of support or services they provide. An alternative, which is similar and consistently available, is the Charitable Activities expenditure in the SORP accounts and the Annual Return.
3. The calculation in the US is based on the average market value of net investments. In the UK we have a year-end value, but not an average during the year. We also lack a clear “net investment” figure which can be applied to all foundations: Investment amounts in accounts do not always include assets held in property or in cash; endowments are not applicable to every foundation; some foundations that make multi-year grants are required to record the future payments as creditors, and not considering these future commitments would skew the understanding of the assets available for distribution. For this reason, we would recommend using the net assets figures, which take into account these liabilities as well as different forms of investment.
4. The structure of both our regulation of, and approach to, assets would make it difficult to use a single figure, as models are varied. Considerations would include impact on the data of permanent/expendable endowments and total return approaches, restrictions on asset forms as well as increasingly diverse forms of philanthropy, and use of assets such as social and mixed motive investments or loan finance. This means that for some, the impact of these charitable activities over the long-term is on the balance sheet rather than only in grant expenditure. There isn’t currently an easy way to disaggregate how different foundations are using their assets for charitable purposes.

An additional challenge is that we have three charity regulators in the UK – the Charity Commission for England and Wales, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland – which provide data in different formats and at different levels of detail, so it isn’t always easy to look at a UK-wide picture.

Outside the data issues, as the charity regulators are outside the tax system, the sanctions for not meeting the required rates are limited – and become even more complex when attempting to apply to trust deeds and donations which have already been made – in some cases centuries ago.