What happens if foster care income exceeds qualifying care relief?

When foster care payments are higher than the available qualifying care relief, only the amount left after applying the relief is considered when calculating taxable foster care profit. The full amount received is not automatically taxable. The excess is then considered alongside your other taxable income, which determines whether tax is payable and how much is due.

Qualifying care relief is designed to cover the costs of providing foster care. The relief is calculated using the rules and rates that apply for the relevant tax year. It may include an annual household amount and an amount linked to the number of children cared for and the length of their placements. The calculation can therefore change when placements begin or end, when the number of children changes, or when fostering arrangements are shared.

To work out whether there is an excess, you generally need to:

• total the foster care payments received during the tax year;
• calculate the qualifying care relief available for that year;
• deduct the relief from the relevant fostering receipts; and
• include any positive balance in your wider income and tax calculation.

For example, if your fostering receipts are greater than the qualifying care relief calculated for the year, the difference is the starting point for assessing taxable foster care profit. If the relief is equal to or greater than the receipts, there may be no taxable profit from fostering under the qualifying care relief rules, although other income and reporting obligations may still need to be considered.

The excess is not assessed in isolation. HMRC considers it with other taxable income, such as employment income, pension income, self-employed profits or certain investment income. Your tax position can therefore differ from another foster carer’s even when both receive similar fostering payments. The applicable tax bands, personal allowances and any other income or reliefs will affect the final result.

If two people foster together, the way the fostering income and qualifying care relief are allocated needs particular care. The treatment can depend on the fostering arrangement, how the income is received and the circumstances of each person. Do not assume that the household excess can simply be divided equally without checking the applicable rules.

Where a taxable amount arises, you may need to report it through Self Assessment. This normally involves reporting the relevant fostering income and the taxable amount in the appropriate sections of your tax return, together with your other income. Registration, filing and payment requirements depend on your circumstances, so check the current HMRC guidance for the relevant tax year. If you already complete a tax return, the excess may need to be included even if fostering is only one part of your income.

Keep records that show how you reached the calculation. Useful evidence can include:

• statements or payment records for fostering income;
• placement dates and the number of children in your care;
• details of any shared fostering arrangement;
• the qualifying care relief calculation used; and
• your Self Assessment workings and supporting documents.

Records should be retained for the period required by HMRC. It is also sensible to recalculate the position when a placement changes rather than waiting until the end of the tax year, particularly if your receipts are close to the available relief.

Do not confuse taxable fostering profit with cash received. A fostering payment may be intended to meet the costs of caring for a child, but the tax calculation follows the specific qualifying care relief rules. Similarly, personal spending does not automatically reduce the taxable amount once the relief calculation has been applied. If your circumstances are unusual, or if you have several income sources, obtain advice from HMRC or a suitably qualified tax adviser before submitting your return.