Are kinship care payments taxable?

Kinship care payments may be taxable, tax-exempt or covered by a specific relief, depending on the legal arrangement and the purpose of the payment. The tax treatment is not determined simply by the fact that the money comes from a local authority or is paid to a relative.

The first point to establish is the type of kinship care arrangement in place. The rules may differ where a child is:

• placed with an approved kinship foster carer;
• living with a special guardian;
• living with someone who holds a child arrangements order; or
• being cared for under an informal family arrangement.

An allowance connected with an approved fostering arrangement is considered under the tax rules for foster carers. Qualifying Care Relief may be available where the relevant conditions are met. This relief is designed to take account of the costs of providing care and can mean that the taxable profit from fostering is reduced or eliminated. A kinship foster carer should not assume that every payment is automatically covered: the approval status, the care arrangement and the records kept are all relevant.

Payments made under a special guardianship arrangement or another court-related arrangement need separate consideration. An allowance might be intended to help with the child’s maintenance, compensate for particular costs, or provide support connected with the arrangement. Those features can affect how it is treated for tax purposes. The written decision, agreement or payment statement should explain what the allowance is for, although it may still be necessary to ask HMRC or a tax adviser to confirm the position.

It is also important to distinguish between different types of money received. A regular allowance for the child’s day-to-day care is not necessarily treated in the same way as:

• a reimbursement of specific expenses;
• a one-off payment for equipment, travel or setting up the placement;
• an amount paid towards adaptations or professional support; or
• a payment made directly to another person or organisation on the child’s behalf.

Keeping these amounts identified separately can make the tax position easier to establish. Keep copies of payment schedules, award letters, agreements, receipts and records showing how payments were used. Do not describe all receipts as one type of income if the local authority has identified different elements.

Tax treatment and benefit treatment are separate questions. A payment that is not taxable may still need to be reported when an application for Universal Credit or another means-tested benefit is assessed, unless the relevant benefit rules disregard it. Conversely, a payment that is treated as income for a benefit calculation is not automatically taxable. Kinship carers should therefore check both sets of rules rather than relying on the answer to one question.

If a tax return is required, the carer should report amounts in the correct way and claim any relief that applies. Someone who has not previously completed a tax return should not register or submit figures based only on the name used for the allowance. The local authority’s finance or kinship support team may be able to confirm the basis on which the payment was made, but HMRC or a qualified tax adviser is the appropriate source for a final tax decision.

Before deciding whether to declare a kinship care payment, gather:

• the child’s legal care arrangement;
• the name of the organisation making each payment;
• the award letter or written agreement;
• the payment dates and amounts;
• any amounts identified as expense reimbursements; and
• details of any fostering approval or qualifying care arrangement.

These details allow the tax position to be considered accurately and help prevent a carer from either overlooking taxable income or declaring money that is covered by an applicable exemption or relief.