How does other income affect tax on foster care payments?

Other income is normally taxed under its own rules, while the fostering element is worked out using qualifying care relief. The two calculations are then brought together to establish your overall tax position. Earning a salary, receiving a pension or having other taxable income does not automatically turn every foster care payment into taxable profit.

How the calculations fit together

For fostering, you first compare the payments received with the qualifying care relief available for your household and placements. This determines whether there is any taxable fostering profit to report. Your employment income, pension income, rental income, savings interest, dividends or other taxable receipts are considered separately under the relevant HMRC rules.

Where a taxable fostering profit does arise, it is added to your other taxable income for the purposes of assessing your total liability. The result can affect:

• how much of your Personal Allowance is available;
• which income tax bands apply to different parts of your income;
• whether tax is due on savings interest or dividends after the relevant allowances;
• whether HMRC expects you to submit a Self Assessment tax return; and
• whether tax needs to be collected through an employment or pension tax code.

Tax is not usually calculated by applying one rate to all the money you receive. Different types of income can have different allowances, deductions and reporting requirements. For example, employment income is generally taxed through PAYE, whereas fostering income may need to be reported as self-employed income. The income tax due is based on the combined calculation, but the way each source is reported remains important.

Qualifying care relief cannot normally be used to reduce unrelated income. It is a relief connected with approved foster care and is used when calculating the taxable profit from fostering. If you have a job or pension as well as fostering income, any unused part of the fostering relief does not generally become a deduction against your salary or pension. Your other income still has to be assessed under its own rules.

Other income can also affect the value of allowances that are not specific to fostering. If your adjusted net income rises above the relevant HMRC threshold, your Personal Allowance may be reduced. Savings and dividend allowances can also depend on your wider tax position. These thresholds and allowances can change, so use the figures for the tax year concerned rather than relying on an older calculation.

Examples of how other income may affect the outcome

• If your fostering receipts are fully covered by qualifying care relief and your only other income is within the available allowances, there may be no income tax to pay on the fostering activity. Your other income must still be reported in the usual way.
• If you have employment income and a taxable fostering profit, the fostering profit may sit on top of your employment income. This can mean that some of the profit is taxed at a higher rate than it would have been if you had no other taxable income.
• If you receive a pension as well as fostering income, PAYE may already use some or all of your allowances. A separate calculation may therefore show additional tax due on the fostering profit.
• If you receive rental income, interest or dividends, those amounts may change your total income even though they are not fostering payments. Each source needs to be included correctly when working out your overall position.

Benefits and other receipts should not be assumed to be taxable or tax-free without checking their specific rules. Some benefits are taxable, while others are not. The same applies to income from property, investments and occasional work. Keep evidence of each source, including payslips, pension statements, bank records and relevant statements, so that the figures used in your tax calculation can be supported.

Having a PAYE job does not necessarily remove the need to register for Self Assessment. If you have taxable fostering income to declare, HMRC may require a return even where your employer already deducts tax from your wages. Conversely, the need to complete a return does not mean that all foster care payments are taxable. The return is used to record the fostering calculation alongside your other income and identify any balance due or repayment owed.

When reviewing your position, separate the following records:

• foster care payments received;
• the qualifying care relief calculation for the relevant tax year;
• employment or pension income already taxed through PAYE;
• other taxable income, such as property income, savings interest or dividends; and
• tax already deducted at source and any allowable expenses or reliefs.

Because the interaction depends on the type and amount of each income source, a calculation based only on the foster care payments can be misleading. Check the current HMRC guidance for the tax year, and seek advice from a suitably qualified tax adviser if you have several income sources, jointly foster, receive property or investment income, or are unsure whether Self Assessment applies.