Service Charge Budgets: How They Work
A clear guide to service charge budgets for leaseholders in England and Wales. Understand how service charges are calculated, what a budget should include, the service charge apportionment methods used to divide costs, and your legal right to challenge and inspect service charge accounts. Whether you live in a small conversion or a large purpose-built block, this guide explains the budget cycle from start to finish.
What Is a Service Charge Budget?
A service charge budget is the annual financial plan that sets out the estimated cost of running, maintaining, and insuring a residential building for the coming year. It is the foundation of the entire service charge process and determines how much each leaseholder will be asked to contribute during the accounting period. Without a properly prepared budget, there is no transparent basis for the demands that leaseholders receive.
The budget is typically prepared by the managing agent on behalf of the freeholder or the directors of a residents' management company. It is based on a review of the building's historical expenditure, current contracts, anticipated maintenance needs, and any planned works for the year ahead. A well-prepared service charge budget provides a line-by-line breakdown of every cost category, giving leaseholders a clear picture of where their money will be spent.
The annual budget cycle works in two stages. First, an interim service charge is demanded based on the estimated budget. At the end of the accounting period, actual expenditure is compared against the budget, and the difference is settled through a balancing service charge - either an additional demand if costs exceeded the estimate, or a credit if there was a surplus. This two-stage approach ensures that leaseholders pay their fair share of actual costs rather than simply an estimate.
How Service Charges Are Calculated
Understanding how is service charge calculated starts with the apportionment method set out in the lease. The total budgeted cost of the building is divided between leaseholders according to one of several service charge apportionment methods. The lease is the governing document, and the managing agent must follow its terms exactly when calculating each leaseholder's share.
There are three common apportionment methods used across residential blocks in England and Wales. The method that applies to your building will be specified in your lease, and it cannot be changed without the agreement of all parties.
Percentage-Based
Each flat pays a fixed percentage of the total service charge budget as stated in the lease. Percentages are usually based on the relative size or value of each unit and should add up to 100 per cent across all flats in the building.
Floor-Area-Based
Costs are divided in proportion to the floor area of each unit. Larger flats pay a greater share of the total budget. This method is common in modern developments where precise measurements are available from the original construction plans.
Equal Share
The total budget is divided equally between all units regardless of size, floor level, or value. This is the simplest method and is often found in smaller converted buildings where all flats are broadly similar in size.
Some leases use different apportionment methods for different categories of expenditure. For example, lift maintenance costs may only be charged to upper-floor flats, while building insurance is split across all units. If you are unsure which method applies to your building, our service charge management team can review your lease and explain your share calculation.
What Should a Service Charge Budget Include?
A comprehensive service charge budget should cover every cost that the freeholder or managing agent is entitled to recover under the terms of the lease. Understanding what is a reasonable service charge on a flat begins with understanding the scope of what the budget covers and whether each line item is justified.
The following checklist sets out the typical line items you should expect to see in a well-prepared budget. If your budget is missing key categories or includes costs that are not permitted under your lease, this may be a reason to challenge the charges. Our service charge guide provides further detail on what each category should include.
Any interest earned on service charge bank interest held in designated trust accounts should also be disclosed in the budget or the year-end service charge accounts. Contributions to a sinking fund or reserve fund should be shown as a separate line item so leaseholders can see how much is being set aside for future major works.
Your Right to Challenge and Inspect
Leaseholders have important statutory rights when it comes to service charge budgets and accounts. Understanding these rights is essential for holding your managing agent accountable and ensuring your charges are fair. The key protections are set out in the Landlord and Tenant Act 1985, and our leaseholder rights guide covers them in full.
The 6 month rule for service charge accounts is one of the most important protections. Under Section 21 of the Landlord and Tenant Act 1985, a summary of relevant costs must be provided to leaseholders within six months of the end of each accounting period. If the landlord or managing agent fails to meet this deadline, leaseholders are not liable to pay those service charge costs until the summary is supplied. This rule ensures prompt preparation of certified service charge accounts and prevents open-ended delays in financial reporting.
A service charge audit provides independent verification that the accounts are accurate and that funds have been properly managed. Whether your accounts need to be audited depends on the terms of your lease and the size of the development. Buildings with more than four dwellings generally require independent certification by a qualified accountant under the Act.
Right to a Summary of Costs
Under Section 21, you can request a written summary of costs for the previous accounting period. The landlord must comply within six months of the year-end.
Right to Inspect Documents
Section 22 gives you the right to inspect invoices, receipts, and other documents supporting the service charge accounts within one month of a written request.
Right to Challenge at Tribunal
Under Section 27A, you can apply to the First-tier Tribunal for a determination of whether any service charge is payable, reasonably incurred, or of a reasonable standard.
If you believe your service charge budget is unreasonable or that costs have not been properly accounted for, our service charge dispute guide explains the step-by-step process for challenging charges, including how to apply to the First-tier Tribunal.
Balancing Charges and Year-End Accounts
The service charge budget is an estimate. Actual expenditure during the year will inevitably differ from the budget on certain line items. At the end of the accounting period, the managing agent reconciles actual costs against the budget and calculates the balancing service charge for each leaseholder. If total costs exceeded the budget, leaseholders receive an additional demand for their share of the shortfall. If costs came in under budget, leaseholders receive a credit against their next interim service charge payment.
The year-end service charge accounts should present a clear comparison of budget versus actual expenditure on every line item, together with an explanation of significant variances. Well-prepared accounts allow leaseholders to understand exactly why their balancing charge or credit has arisen and to satisfy themselves that costs have been reasonably incurred and properly documented.
At Block, we prepare fully itemised year-end accounts for every building we manage. Our accounts are independently certified and distributed to leaseholders within the statutory six-month deadline. We also hold service charge bank interest in designated trust accounts, and any interest earned is credited to the service charge fund for the benefit of leaseholders.
Interim Service Charge
The estimated payments collected during the year based on the approved service charge budget. These are typically demanded quarterly or half-yearly and fund the day-to-day running costs of the building throughout the accounting period.
Balancing Service Charge
The year-end adjustment that reconciles estimated payments against actual expenditure. This ensures leaseholders pay their fair share of the true cost of services provided, neither more nor less than was actually spent on the building during the period.
Frequently Asked Questions About Service Charge Budgets
What is a service charge budget?
A service charge budget is the annual financial plan prepared by a managing agent or freeholder that estimates the total cost of running, maintaining, and insuring a residential building for the year ahead. The budget covers every anticipated expense, from building insurance and communal cleaning to compliance work and management fees. Each leaseholder is then charged their share of the budgeted total, usually payable quarterly or half-yearly as an interim service charge. At the end of the accounting period, actual expenditure is compared against the budget and any difference is reconciled through a balancing charge or credit.
How is service charge calculated?
Service charge is calculated by first estimating the total cost of maintaining and managing the building for the year, then dividing that total between leaseholders according to the apportionment method set out in each lease. The three most common apportionment methods are percentage-based (each flat pays a fixed percentage stated in the lease), floor-area-based (costs are divided in proportion to the size of each unit), and equal share (the total is split equally between all units regardless of size). The lease is the governing document and the managing agent must follow it exactly when calculating each leaseholder contribution.
What is a reasonable increase in service charge?
A reasonable increase in service charge depends on the specific cost drivers affecting the building. Insurance premiums, contractor rates, and compliance requirements all fluctuate year on year, and a well-prepared budget will reflect these changes transparently. There is no fixed percentage that defines a reasonable increase; instead, each line item should be individually justified by reference to actual costs, competitive quotes, or contractual obligations. Under the Landlord and Tenant Act 1985, service charges must be reasonably incurred and relate to services provided to a reasonable standard. If you believe an increase is unjustified, you have the right to request a breakdown and challenge the charges.
What is the 6 month rule for service charge accounts?
The 6 month rule for service charge accounts comes from Section 21 of the Landlord and Tenant Act 1985. It requires that a summary of relevant costs must be provided to leaseholders within six months of the end of each accounting period. If the landlord or managing agent fails to supply the summary within this timeframe, leaseholders are not liable to pay service charge costs relating to that period until the summary is provided. This rule creates a strong incentive for managing agents to prepare year-end service charge accounts promptly and ensures leaseholders receive timely financial information about how their contributions have been spent.
Do service charge accounts need to be audited?
Whether service charge accounts need to be audited depends on the terms of the lease and the size of the development. Under the Landlord and Tenant Act 1985, buildings with more than four dwellings require the summary of costs to be audited or certified by a qualified accountant. Many leases go further and require a full service charge audit regardless of the number of units. The ICAEW Technical Release Tech 03/11 provides industry-standard guidance on the level of assurance required, ranging from a full audit to an agreed-upon procedures engagement. Block arranges independent certification for all service charge accounts as standard practice.
What is the right to inspect service charge accounts?
Under Section 22 of the Landlord and Tenant Act 1985, leaseholders have the statutory right to inspect the accounts, invoices, receipts, and other documents that support the service charge summary of costs. The landlord or managing agent must make these documents available for inspection within one month of receiving a written request, and must provide facilities for the leaseholder to take copies. This right of inspection allows leaseholders to verify that charges match actual invoices, that contractors have been competitively appointed, and that no undisclosed commissions or mark-ups have been applied to the service charge.
Transparent Budgets You Can Trust
Whether you need help understanding your service charge budget, want to challenge unreasonable charges, or are looking for a managing agent that puts transparency first, Block Management Company is here to help. Our approach to service charge management is built on open accounting, competitive tendering, and full compliance with leaseholder protection legislation.