Is income from fostering taxable?

The relevant tax framework for foster carers is HMRC’s Qualifying Care Relief scheme. It provides a special way to calculate taxable fostering profits by applying a tax relief threshold to qualifying fostering receipts. The relief is intended to recognise the costs involved in caring for children and young people, so the full amount paid to a foster carer is not necessarily taxable profit.

What counts as fostering income? The starting point is usually the total amount received for providing foster care during the tax year. This can include fostering allowances, fees and other payments connected with an approved fostering placement. Keep statements, remittance advices and payment records from the fostering service, as these help establish the total received and explain what each payment was for.

Not every payment will necessarily be treated in exactly the same way. For example, the treatment of a payment may depend on whether it relates to an active placement, preparation for a placement, respite care or another fostering arrangement. If a payment is unclear, check its description with the fostering service and obtain tax advice before completing a return.

How Qualifying Care Relief works

Qualifying Care Relief is made up of:

• a fixed annual amount for the fostering household; and
• an additional amount for each child or young person placed in the home, calculated according to the qualifying care provided during the tax year.

The relevant amounts are set by HMRC and can change from one tax year to the next. If qualifying fostering receipts are within the available relief, there may be no taxable fostering profit to report. Where receipts are higher than the relief, the excess is generally the amount considered when working out taxable profit under this scheme.

The relief is based on the fostering household rather than simply treating every payment as the individual carer’s ordinary wages. Where two people foster together, the way the income and relief are allocated can depend on the arrangement and how the fostering activity is carried on. Couples should keep consistent records and take advice if they are unsure whether income should be divided between them.

There are two broad ways to calculate fostering profit

• Qualifying Care Relief: total qualifying fostering receipts are reduced by the applicable household and placement relief.
• Actual profit calculation: allowable business expenses connected with fostering are deducted from receipts under the normal tax rules.

A foster carer may generally compare the available calculation methods and use the one that gives the correct result for their circumstances. The same fostering income and the same costs should not be relieved twice. Qualifying Care Relief is designed to simplify the calculation, whereas an actual-expense calculation requires detailed evidence of allowable costs.

What happens if some income is taxable? Any taxable profit is normally treated as self-employed income rather than employment salary. It is added to other taxable income when working out the individual’s overall position for the tax year. This means the amount of tax due can depend on other earnings, pension income, taxable benefits, personal allowances and the person’s marginal tax position.

A foster carer may need to register for Self Assessment and submit a tax return where the circumstances require it. Registration and filing obligations depend on the level and type of taxable income, as well as any other self-employed work. Having no tax to pay does not automatically answer whether a return or notification is required, so check the current HMRC rules for the relevant tax year.

National Insurance is separate

Income tax and National Insurance are different issues. A foster carer may have National Insurance responsibilities even where Qualifying Care Relief means there is little or no taxable profit for income tax purposes. The position can depend on the level of self-employed profit and the person’s wider circumstances, so it should be checked separately rather than assumed from the income tax calculation.

Keep records throughout the tax year

Useful records include:

• payments received for each placement;
• the dates and duration of placements;
• the number of children or young people in the household;
• any respite, emergency or other fostering payments;
• receipts for costs that may be relevant to an actual-expense calculation;
• payment summaries and annual statements from the fostering service; and
• copies of tax returns, calculations and correspondence with HMRC.

Records should be clear enough to distinguish fostering receipts from personal income and from payments connected with other work. This is particularly important where a household includes more than one foster carer or where one person has additional self-employed activities.

Tax rules and relief amounts can change, and the correct treatment may differ according to the fostering agreement, household circumstances and other income. Foster carers should use the current HMRC guidance for the relevant tax year and consider advice from a qualified tax adviser. The fostering service can also explain what each payment represents, but it cannot replace individual tax advice.