Are private fostering payments taxable?

Private fostering payments do not have one automatic tax treatment. Whether money you receive is taxable depends on why it is paid, who pays it, the terms of the arrangement and whether it amounts to income from providing care. Private foster carers should not assume that a payment is tax-free simply because it is described as an allowance or contribution towards costs.

Private fostering is different from fostering through a local authority or independent fostering agency. In a private arrangement, a child’s parent, guardian or another person may provide money to the carer under an agreed arrangement. The payment is not normally a standard fostering allowance set by a fostering service, so the usual rules and schemes associated with approved foster care may not apply.

What HMRC may consider

The tax position can depend on the substance of the arrangement rather than the label used. Relevant factors may include:

• whether the payment is intended to cover the child’s food, clothing, activities and other everyday costs;
• whether you receive more than the reasonable costs of caring for the child;
• whether payments are regular, fixed or made under a written agreement;
• whether caring for the child is being carried out as a business or income-generating activity;
• whether the money is a reimbursement of specific expenses or a general payment for providing care; and
• your wider personal and financial circumstances.

A payment that only reimburses properly evidenced costs may be viewed differently from a payment that rewards you for providing accommodation and care. However, it is not safe to decide that money is non-taxable based on its description alone. The complete arrangement should be considered.

Why approved foster care relief may not apply

Approved foster carers can be covered by specific tax rules for qualifying care relief, subject to the relevant conditions. A private foster carer is not automatically entitled to use those rules merely because they are caring for a child in their home. The legal basis of the placement and the carer’s approval status matter, so private foster carers should obtain advice before applying any foster-carer tax treatment to their payments.

Keep clear financial records

Keep the written agreement and a record of every payment received. It is also sensible to retain receipts or other evidence for costs paid on the child’s behalf, such as food, clothing, travel, school items and activities. Record who made each payment, its date, its amount and what it was intended to cover. This can help distinguish care-related expenditure from money that may be treated as income.

Do not deduct expenses or use a tax allowance without checking that the relevant rules permit it. If the arrangement creates taxable income, you may need to report it to HMRC and keep records for the required period. Depending on how the arrangement operates, there may also be implications for National Insurance or other parts of your tax position.

Tax can affect more than your income tax return

Income from private fostering may need to be considered when checking entitlement to means-tested benefits, tax credits where relevant, or other support based on household income. It may also affect how you complete financial information requested by another organisation. A payment that is not taxable in one context should not automatically be treated as irrelevant in every other assessment.

Get advice before payments begin

Ask the child’s parent or guardian to set out the proposed payment arrangement clearly before the placement starts. Then discuss the arrangement with HMRC or a qualified tax adviser who can consider the specific facts, including the child’s age, the nature of the care, the payer, the payment amount and your other income. Keep written confirmation of any advice received and review the position if the payment, placement or responsibilities change.

Tax treatment is separate from the safeguarding and notification duties that apply to private fostering. You should still contact the relevant local authority about the arrangement and follow its requirements, even if you believe the payments are only intended to cover expenses.