diff --git a/prdoc/pr_8108.prdoc b/prdoc/pr_8108.prdoc
new file mode 100644
index 0000000000000..4b037c6f70ca7
--- /dev/null
+++ b/prdoc/pr_8108.prdoc
@@ -0,0 +1,11 @@
+title: "[pallet_balances] Account for reserved balance in `ensure_can_withdraw` function"
+
+doc:
+- audience: [Runtime Dev, Runtime User]
+  description: |-
+    The function `ensure_can_withdraw` now ensures the `new free balance` is higher 
+    or equal to the `usable balance`.
+
+crates: 
+- name: pallet-balances
+  bump: patch
\ No newline at end of file
diff --git a/substrate/frame/balances/src/impl_currency.rs b/substrate/frame/balances/src/impl_currency.rs
index f453b23420c40..dfc7febd87146 100644
--- a/substrate/frame/balances/src/impl_currency.rs
+++ b/substrate/frame/balances/src/impl_currency.rs
@@ -315,13 +315,29 @@ where
 	fn ensure_can_withdraw(
 		who: &T::AccountId,
 		amount: T::Balance,
-		_reasons: WithdrawReasons,
+		reasons: WithdrawReasons,
 		new_balance: T::Balance,
 	) -> DispatchResult {
 		if amount.is_zero() {
 			return Ok(())
 		}
-		ensure!(new_balance >= Self::account(who).frozen, Error::<T, I>::LiquidityRestrictions);
+		let account = Self::account(who);
+
+		// Account for the new reserved amount only if withdrawing for a reserve.
+		let updated_reserved = if matches!(reasons, WithdrawReasons::RESERVE) {
+			account.reserved.saturating_add(amount)
+		} else {
+			account.reserved
+		};
+
+		// Frozen balance applies to total. Anything on hold therefore gets discounted from the
+		// limit given by the freezes
+		let untouchable = account
+			.frozen
+			.saturating_sub(updated_reserved)
+			.max(T::ExistentialDeposit::get());
+
+		ensure!(new_balance >= untouchable, Error::<T, I>::LiquidityRestrictions);
 		Ok(())
 	}
 
diff --git a/substrate/frame/balances/src/tests/currency_tests.rs b/substrate/frame/balances/src/tests/currency_tests.rs
index 0e5d7ccb46dee..726b78582f422 100644
--- a/substrate/frame/balances/src/tests/currency_tests.rs
+++ b/substrate/frame/balances/src/tests/currency_tests.rs
@@ -280,6 +280,48 @@ fn lock_should_work_reserve() {
 		});
 }
 
+#[test]
+fn reserve_should_work_for_usable_balance() {
+	frame_support::__private::sp_tracing::init_for_tests();
+	ExtBuilder::default()
+		.existential_deposit(1)
+		.monied(true)
+		.build_and_execute_with(|| {
+			// Check balances
+			let account = Balances::account(&1);
+			assert_eq!(account.free, 10);
+			assert_eq!(account.frozen, 0);
+			assert_eq!(account.reserved, 0);
+
+			Balances::set_lock(ID_1, &1, 9, WithdrawReasons::RESERVE);
+
+			let account = Balances::account(&1);
+			assert_eq!(account.free, 10);
+			assert_eq!(account.frozen, 9);
+			assert_eq!(account.reserved, 0);
+
+			assert_ok!(Balances::reserve(&1, 5));
+
+			let account = Balances::account(&1);
+			assert_eq!(account.free, 5);
+			assert_eq!(account.frozen, 9);
+			assert_eq!(account.reserved, 5);
+
+			assert_ok!(Balances::reserve(&1, 4));
+
+			let account = Balances::account(&1);
+			assert_eq!(account.free, 1);
+			assert_eq!(account.frozen, 9);
+			assert_eq!(account.reserved, 9);
+
+			// Check usable balance
+			// usable_balance = free - max(frozen - reserved, ExistentialDeposit)
+			// 0 = 1 - max(9 - 9, 1)
+			let usable_balance = Balances::usable_balance(&1);
+			assert_eq!(usable_balance, 0);
+		});
+}
+
 #[test]
 fn lock_should_work_tx_fee() {
 	ExtBuilder::default()
@@ -754,7 +796,10 @@ fn existential_deposit_respected_when_reserving() {
 		assert_eq!(Balances::reserved_balance(1), 1);
 
 		// Cannot reserve any more of the free balance.
-		assert_noop!(Balances::reserve(&1, 1), DispatchError::ConsumerRemaining);
+		// free = 100
+		// reserved = 1
+		// existential deposit = 100
+		assert_noop!(Balances::reserve(&1, 1), Error::<Test>::LiquidityRestrictions);
 	});
 }
 
diff --git a/substrate/frame/staking/src/tests.rs b/substrate/frame/staking/src/tests.rs
index 1b3411b65360d..bdf157edfacaa 100644
--- a/substrate/frame/staking/src/tests.rs
+++ b/substrate/frame/staking/src/tests.rs
@@ -502,7 +502,7 @@ fn staking_should_work() {
 			}
 		);
 		// e.g. it cannot reserve more than 500 that it has free from the total 2000
-		assert_noop!(Balances::reserve(&3, 501), DispatchError::ConsumerRemaining);
+		assert_noop!(Balances::reserve(&3, 501), BalancesError::<Test, _>::LiquidityRestrictions);
 		assert_ok!(Balances::reserve(&3, 409));
 	});
 }