Are fostering allowances taxable?

Fostering payments are treated as income for tax purposes, but approved foster carers can generally use HMRC’s Qualifying Care Relief (QCR) to reduce the taxable amount. QCR is designed to recognise the costs of looking after a child in foster care and can mean that no taxable fostering profit remains.

How Qualifying Care Relief works

QCR is made up of two elements:

• a fixed annual tax relief for the foster household; and
• a further relief for each child or young person in placement, calculated by reference to the length of the placement.

The available amounts and detailed rules can change, so current HMRC guidance should be used for the relevant tax year. Where the receipts from qualifying foster care do not exceed the available relief, the fostering activity will normally produce no taxable profit. If receipts are higher than the relief, the excess may be taxable.

What counts as fostering income?

HMRC may consider payments connected with an approved fostering arrangement when working out qualifying care receipts. This can include regular fostering payments and certain payments made for a child’s care, depending on the arrangement. The treatment can differ where money is received for another service, such as unrelated consultancy, training or employment, so separate sources of income should not automatically be included in the fostering calculation.

Fostering payments should also be kept separate from personal benefits or household income that is not connected with providing foster care. The fact that money is described as an allowance does not, on its own, decide how it is treated for tax.

Do foster carers need to complete a tax return?

Some foster carers need to register as self-employed and complete a Self Assessment tax return, particularly where their taxable profit or other circumstances require it. A foster carer may still need to report information to HMRC even where QCR reduces the fostering profit to nil. The correct position depends on the carer’s total income, profit and other tax responsibilities.

Foster carers who receive income from employment, self-employment, property or investments may have reporting obligations that are separate from the fostering calculation. QCR only relates to qualifying care income; it does not make other income tax-free.

How should records be kept?

Keep a clear record for each tax year, including:

• payments received from the fostering service or agency;
• the dates each child or young person was in placement;
• any payments made for specific care-related purposes;
• records showing whether a payment relates to fostering or another activity; and
• copies of statements, payment summaries and relevant correspondence.

QCR normally provides a simplified way to calculate the taxable result for qualifying care. This means foster carers should not assume that ordinary expense claims can be added to the QCR calculation. If a payment or expense is unclear, obtain advice before including it in a tax return.

What if two people foster together?

Where a couple or two approved carers foster together, the way receipts and relief are allocated can depend on the household arrangement and each person’s tax position. The fixed household element is not necessarily available separately to every individual in the household. Keep records showing who received the payments and seek advice where both carers have separate income or tax returns.

Tax is separate from benefits and National Insurance

The tax treatment of fostering allowances does not automatically determine how fostering may affect Universal Credit, other benefits, tax credits or National Insurance. Those systems have their own rules and may use different definitions of income. A foster carer should check each position separately rather than assume that a payment treated favourably for tax will be disregarded elsewhere.

HMRC guidance should be checked whenever a placement arrangement changes, a new type of payment is introduced or the carer’s wider income changes. For complicated circumstances, such as fostering alongside self-employment or receiving payments under more than one arrangement, a qualified tax adviser can confirm what must be reported.