Are foster carers taxed on their fostering payments?

For tax purposes, fostering payments are usually dealt with under HMRC’s qualifying care relief rules. These rules give approved foster carers a specific tax allowance based on the fostering household and the children placed, rather than treating every pound received as ordinary taxable income.

Qualifying care relief generally works by comparing the fostering receipts for the tax year with:

• a fixed tax-free amount for the household; and
• an additional amount linked to the number of children fostered and, in some cases, their age.

The relevant allowances and thresholds can change, so the current HMRC figures should be checked for the tax year concerned. If the total fostering receipts are covered by the available relief, there may be no taxable fostering profit. If receipts exceed the relief, the surplus may need to be included when working out taxable income.

The relief normally relates to fostering as a household activity. Where two people foster together, they should not assume that each person can claim the full household allowance separately. How the income is recorded can depend on the approval arrangements, the fostering agreement and whether one or both carers are treated as carrying on the fostering activity.

Fostering payments can include several elements, such as money intended for the child’s day-to-day care and a fee or reward for the carer. For tax purposes, the important figure is usually the total amount received under the fostering arrangement, followed by the appropriate relief calculation. The fact that part of a payment is intended for food, clothing, travel or activities does not automatically make that part tax-free.

Tax treatment can be affected by circumstances outside fostering, including:

• other self-employed or employment income;
• fostering for more than one organisation;
• the number and ages of children placed during the tax year;
• whether a placement starts or ends during the year; and
• whether the carer uses qualifying care relief or needs to consider a different calculation.

Foster carers should keep clear records even when they expect no tax to be due. Useful records include payment statements, fostering agreements, placement dates, the number and ages of children placed, fees and allowances received, and relevant expenses. Records help establish whether the relief has been applied correctly and provide evidence if HMRC asks how the figures were calculated.

If a taxable amount remains after applying the available relief, the foster carer may need to register for Self Assessment and report the income. Registration and filing requirements depend on the individual’s circumstances, so a carer should not rely solely on the fact that most or all fostering payments have been covered by relief. HMRC or a tax adviser can confirm whether a return is required.

Qualifying care relief is separate from the fostering allowance itself. The allowance is intended to contribute towards the costs of caring for a child, while tax relief determines how fostering receipts are treated when calculating taxable income. It is also separate from benefits, pension contributions and any tax relating to other work.

Before completing a tax return, foster carers should check the current HMRC guidance and retain their annual payment summary or equivalent records. Where there are several carers in the household, multiple placements or other sources of income, professional tax advice can help ensure that the household uses the correct relief and reports any taxable amount accurately.