Are fostering payments taxable?

The tax treatment of fostering payments depends on whether the income qualifies for HMRC’s Qualifying Care Relief and whether the total receipts are within the relief available for the tax year. Fostering is generally treated as self-employed work for tax purposes, rather than ordinary employment, so foster carers need to consider record-keeping and Self Assessment as well as the payments they receive.

Qualifying Care Relief is a special tax arrangement for approved foster carers. It provides a fixed tax relief for the fostering household, together with an additional amount based on the number of children cared for and the length of their placements during the tax year. The relief is deducted from qualifying fostering receipts when working out whether there is taxable profit.

Qualifying receipts can include payments from a local authority or fostering service for providing foster care. Depending on the arrangement, this may include maintenance payments, professional or skills fees, and other amounts connected directly with caring for a foster child. The wording used by a fostering service does not, by itself, decide the tax treatment, so keep statements and payment records and check how each payment should be classified.

If qualifying fostering receipts are higher than the available relief, the excess is normally treated as taxable profit. This does not mean that every pound received is taxed. The calculation is based on the relevant receipts and relief for that tax year, so the result can vary according to the number of children placed, the duration of placements and whether more than one adult in the household is an approved foster carer.

Where two or more foster carers in the same household receive or share fostering income, the relief and receipts may need to be allocated between them under HMRC’s rules. The way payments are divided should reflect the actual fostering arrangement and should be recorded consistently. It is sensible to ask HMRC or a qualified tax adviser to check the position where carers are approved by different services, work jointly, or receive separate fees.

Foster carers should keep clear records throughout the tax year, including:

• payment statements and invoices from the fostering service;
• the dates and duration of each placement;
• which children were placed and the type of care provided;
• fees, allowances and other fostering-related receipts shown separately where possible;
• relevant expenses and receipts, even where Qualifying Care Relief is being used; and
• any tax returns, calculations or correspondence with HMRC.

Keeping expenses recorded is useful because some costs may relate to other taxable self-employed activities or to the household generally. Qualifying Care Relief has its own calculation rules, and actual expenses should not simply be mixed into the calculation without checking whether they can be claimed against that particular income. A tax adviser can explain which method is appropriate for your circumstances.

Not every payment connected with fostering is necessarily treated in the same way. For example, a payment for a separate job, an unrelated benefit, rental income or income from another business is considered under its own tax rules. Likewise, money provided specifically for a child’s personal needs should be identified clearly rather than assumed to be personal income. The source, purpose and paperwork for each payment matter.

You may need to register for Self Assessment if your taxable fostering profit, or your wider circumstances, require you to do so. Even where Qualifying Care Relief means there is no tax to pay on fostering receipts, HMRC may still require information about the activity. Registration and filing obligations can change, so check the current guidance rather than relying on an older return or advice given to another carer.

Tax is assessed by tax year, not simply by the date on which a fostering agreement began. A placement crossing 5 April may therefore need to be reflected across two tax years. Changes in approval, placement numbers, respite arrangements, fees or the number of carers in the household can also affect the calculation.

Before approval, you may incur costs such as travel, training or preparation expenses. These are not automatically taxable fostering payments, and whether they can be claimed for tax depends on the circumstances and the nature of the expense. Keep the records and ask for advice rather than treating every fostering-related cost in the same way.

The safest approach is to keep fostering income separate from household spending, retain documents for the required period and review the calculation each tax year. HMRC’s current guidance or a qualified tax adviser can confirm whether you need to submit a return, how Qualifying Care Relief applies to your placements and whether National Insurance or other obligations arise from your overall self-employed profit.