How is the foster care tax allowance calculated?

The foster care tax allowance is calculated by comparing your total fostering receipts for the tax year with the Qualifying Care Relief available to your household. That relief consists of a fixed annual household amount plus a weekly amount for each child placed with you, with the applicable weekly amount determined by the child’s age.

The calculation works as follows:

• Add together the fostering payments and other qualifying receipts you received during the tax year.
• Identify the annual household amount set by HM Revenue and Customs (HMRC) for that tax year.
• Count the qualifying placement weeks for each child and apply the relevant weekly amount according to their age.
• Add the annual amount and the weekly amounts together to calculate your total Qualifying Care Relief.
• Compare the relief with your total qualifying fostering receipts. Receipts covered by the relief are not treated as taxable profit; only any excess may need to be included as taxable income.

Example of the method: if a household has one child placed for part of the tax year and another child placed for a different period, the weekly relief is calculated separately for each placement. The two results are then added to the annual household amount. This means the calculation reflects the number of children cared for and the length of each placement, rather than simply applying one allowance to the household’s total receipts.

The age of a child is important because HMRC uses different weekly relief amounts for children below and above the relevant age threshold. If a child’s age changes during the tax year, check which rate applies to each relevant period and keep records that show how the calculation was made.

Qualifying Care Relief is based on the household and its qualifying care activity, so it is important to establish who received the fostering payments and how the fostering arrangement is organised. Where more than one adult in the household fosters, the relief may need to be allocated correctly between the people responsible for reporting the income. The precise treatment can depend on the fostering agreement and individual tax circumstances.

Not every payment connected with fostering should automatically be treated in the same way. Regular fostering allowances, fees and other receipts should be checked against the guidance for qualifying care receipts. Payments or benefits that fall outside the scheme may need separate tax treatment, even if they are connected with caring for a child.

HMRC’s rates and rules can change between tax years. Use the figures that apply to the tax year being assessed, rather than carrying forward a previous calculation. Keep a record of:

• the dates each child was placed and any periods when the placement did not apply;
• the child’s age during the relevant periods;
• each fostering payment, fee or other receipt;
• which household or individual received each payment; and
• the HMRC rates and guidance used for the calculation.

If your total fostering receipts do not exceed the available Qualifying Care Relief, the fostering income may not create a taxable profit under this scheme. If receipts are higher than the relief, the excess is the amount that needs closer attention for tax purposes. This does not necessarily mean that the whole fostering payment is taxable.

Foster carers should keep the calculation and supporting records with their other tax documents. If the arrangement includes unusual payments, several carers, overlapping placements or another source of self-employed income, professional tax advice can help confirm how the relief should be applied and whether anything needs to be reported to HMRC.