This guide describes the principles that underlie allocations of grants to universities and colleges by the Higher Education Funding Council for England (HEFCE). Formulas are used to determine how most of the money is allocated between institutions. These take into account certain factors for each institution, including the number and type of students, the subjects taught, and the amount and quality of research undertaken there. After the amount of funding is determines, it is provided in the form of a "block grant" that institutions are free to spend according to their own priorities within broad guidelines. It is not expected that institutions will model their internal allocations on the HEFCE funding method. The Government operates a rolling 3-year process to set public expenditure across all departments. Each year the total funds are divided among teaching, research, and special funding, with the breakdown for 2003-2004 as shown: (1) 3,999 million pounds for teaching; (2) 1,042 million pounds for research; (3) 862 million pounds for special funding; and (4) 178 million pounds for rewarding and developing staff in higher education. An attachment contains funding examples. (SLD)