Are monthly foster carer payments taxable?

For tax purposes, fostering income is generally assessed over the tax year rather than by looking at each monthly payment in isolation. HMRC’s Qualifying Care Relief scheme allows eligible foster carers to reduce the fostering receipts used in their tax calculation by a set household amount and an additional amount linked to the children in their care.

How Qualifying Care Relief works

The relief is designed to recognise the costs involved in providing foster care. The calculation usually considers:

• the fixed amount available to the fostering household for the tax year;
• the number of qualifying children cared for; and
• how many weeks each child was placed with you during that tax year.

The relevant figures and rules can change, so use the current HMRC guidance when working out your position. The household element is generally claimed once for the household, rather than separately by each foster carer.

If your qualifying fostering receipts are covered by the available relief, the resulting taxable profit from fostering may be nil. If the receipts are higher than the relief, the amount above the relief is normally considered when calculating your taxable profit. This does not mean the payment itself changes; it affects the amount used for tax purposes.

Which payments should be included?

Keep a record of every payment received in connection with fostering and what it relates to. This can include fostering allowances, fees and other amounts paid by a fostering service. Do not assume that a payment is outside the tax calculation simply because it is described as an allowance or reimbursement. The correct treatment can depend on the purpose of the payment and the terms of your fostering arrangement.

Payments for different types of placement may also need to be recorded separately. For example, the number of children placed, their ages and the length of each placement can affect the relief calculation. Respite or short-term arrangements should be checked carefully, particularly where the placement does not cover a complete week.

Do foster carers need to complete a tax return?

Many foster carers are treated as self-employed for tax purposes, although the exact position depends on their circumstances. You may need to register for Self Assessment and report taxable profits if your fostering income is not fully covered by the available relief, or if you have other reasons to submit a tax return.

Having no taxable profit from fostering does not automatically mean that all of your income is tax-free. Employment income, pension income, rental income, investments or profits from another business are considered separately and may still create a tax liability. Your overall tax position can also depend on whether you foster alone or with another carer and how income is recorded.

Records to keep

Even where you expect to owe no tax on fostering income, maintain clear records. Keep:

• payment statements and invoices from the fostering service;
• placement dates, the number of children placed and relevant age information;
• records of respite or emergency placements;
• fostering-related expenses and receipts, where you are using or considering an actual-expenses calculation; and
• details of any other income relevant to your tax return.

Qualifying Care Relief is a simplified method, so you should not automatically combine it with claims for actual expenses relating to the same fostering income. In some circumstances, comparing the available methods may be useful, but a tax adviser can confirm which approach is appropriate.

What about National Insurance?

Income tax and National Insurance are separate matters. A foster carer may have little or no income tax to pay under Qualifying Care Relief but still need to consider National Insurance if their self-employed profits reach the relevant level. The rules and thresholds can change, so check the current HMRC position rather than relying on an old calculation.

Tax treatment is separate from the fostering assessment process, but it is sensible to raise questions about records, payments and self-employment before or during your application. Become a Foster Family can provide general guidance about fostering payments and help you identify questions to discuss with HMRC or a qualified tax adviser. For advice based on your complete income and household circumstances, use HMRC guidance or seek professional tax advice.