Are kinship fostering payments taxable?

The tax treatment depends on the legal basis of the placement and the organisation making the payment. A payment made to an approved kinship foster carer is normally considered under the tax rules for foster carers, while an allowance paid to a special guardian, kinship carer or someone with a child arrangements order may fall under different rules.

Payments received as an approved foster carer

Where a child is placed with you under a formal fostering arrangement, the receipts are generally treated as qualifying care receipts. Foster carers can usually claim qualifying care relief , also known as foster carer tax relief. This relief is designed to cover the costs of caring for foster children and can mean that no taxable profit arises from the fostering payments, provided the relevant conditions and allowances apply.

The calculation is based on the qualifying care relief rules rather than simply asking whether the council calls a payment an allowance. The relief takes account of the number of children in your care and the length of the placement. If your qualifying care receipts are within the available relief, there may be no taxable fostering profit to declare. If they exceed the applicable relief, the excess may need to be included when working out your taxable income.

This treatment can apply to kinship foster carers where the child is formally fostered by a relative or connected person and the carer has been approved under the fostering framework. Approval and payment arrangements should be confirmed with the local authority because a family placement does not automatically have the same legal status as foster care.

When the payment is not foster care income

Kinship care can be arranged in several ways. A relative may care for a child under:

• a fostering placement;
• a special guardianship order;
• a child arrangements order; or
• an informal family arrangement.

An allowance connected with a special guardianship order or another court-based arrangement is not automatically covered by foster carer tax relief. Its treatment may depend on the purpose of the payment, the terms of the arrangement and your wider tax position. The same applies to one-off placement payments, reimbursements, grants and other support: their tax treatment cannot be decided from the word “allowance” alone.

Payments intended to reimburse specific costs may be treated differently from money paid as a general allowance. Keep the award letter, payment schedule and any information explaining what each payment is for. These documents can help establish whether a receipt relates to caring costs, a service provided, an expense reimbursement or another form of support.

Tax and benefits are separate questions

A kinship fostering payment may have one treatment for income tax and another for means-tested benefits. Child Benefit, Universal Credit, tax credits where relevant, housing support and other benefits each have their own rules. A payment that is not taxable is not necessarily ignored when a benefit is assessed, and a payment that is considered in a benefit calculation is not automatically taxable income.

If you receive benefits, report changes in accordance with the instructions from the relevant benefits office and provide the payment details they request. Do not assume that the tax position answers the benefits question.

What to check before completing a tax return

• Identify the legal arrangement: fostering, special guardianship, a child arrangements order or an informal arrangement.
• Check who makes the payment and what the written decision says it is intended to cover.
• Separate regular allowances from one-off payments and expense reimbursements.
• Keep payment records, placement dates, receipts and relevant correspondence.
• Ask the local authority whether you are approved as a foster carer and whether the payments are made under that fostering arrangement.
• Use HM Revenue and Customs guidance or obtain advice from a qualified tax adviser if the arrangement is unclear or your receipts are above the available relief.

Do not assume that you need to pay tax simply because money is transferred to you, but do not assume that every kinship payment is exempt either. The decisive points are the legal status of the placement, the nature of the payment and whether qualifying care relief applies. The local authority should be able to explain the basis of its payments, while HM Revenue and Customs or a tax adviser can confirm how they should be reported in your individual circumstances.