Are kinship care payments taxable?

The first step is to identify the legal basis for the child’s placement and the organisation making each payment. Tax treatment can differ between an approved kinship foster placement, a special guardianship arrangement, a child arrangements order and an informal family arrangement. The name given to a payment, such as “allowance” or “support payment”, does not determine its tax status by itself.

Approved kinship foster carers

If you are approved as a foster carer and the child is placed with you through a fostering service, payments will generally need to be considered under the tax rules for foster carers. These rules include qualifying care relief , a system designed to take account of the costs of caring for children placed with foster families.

Qualifying care relief can reduce the amount of fostering income treated as taxable. Depending on the relevant calculation, a foster carer may have no taxable profit from fostering, but this should not be assumed without checking the figures and the current HMRC rules. The calculation can depend on the household’s qualifying care receipts, the number and type of placements, and the period covered.

Being related to the child does not, on its own, decide whether fostering tax rules apply. Your approval as a foster carer, the fostering service’s arrangement and the way the payment is recorded are important. Ask the fostering service or local authority to confirm whether the placement is a foster placement and which payments relate to it.

Special guardianship and other legal arrangements

A payment made under a special guardianship arrangement or another legal order is not dealt with in exactly the same way as fostering income. Some support payments may be disregarded for tax purposes, while another payment or source of income could have different consequences. The wording of the order, the purpose of the payment and the authority’s records may all be relevant.

Payments made under a child arrangements order, or support provided through an informal kinship arrangement, also need to be considered on their own facts. Money intended to meet a child’s day-to-day needs is not automatically employment income, but it should not be described as tax-free without confirmation. A one-off payment, regular allowance, reimbursement of specific expenses and payment for providing care may each be treated differently.

What income may need to be reported?

Keep a clear record of every payment connected with the child, including:

• the date and amount received;
• who made the payment;
• the reason for the payment;
• whether it was a regular allowance, a one-off payment or reimbursement;
• the legal or care arrangement under which it was made; and
• any written explanation supplied by the local authority, fostering service or other organisation.

Do not assume that a payment does not need to be mentioned simply because no tax is ultimately due. Depending on your circumstances, HMRC may still require information about the income or the way qualifying care relief has been applied. You may also have other taxable income that is separate from the kinship payment, so the overall position cannot be assessed from the allowance alone.

Foster carers should keep their fostering payment statements and records of relevant receipts and expenses. Qualifying care relief is intended to reflect the costs of caring, but it does not remove the need for accurate records. If you have more than one placement, care for children in different arrangements or receive payments from more than one source, keep the records separate.

Tax is separate from benefits and other assessments

A payment’s tax treatment does not automatically determine how it will be treated for benefits, council support, childcare assistance or other means-tested assessments. Those schemes can have their own definitions and rules. If you receive benefits or are applying for them, report information in the way the relevant authority requests rather than relying only on HMRC’s view.

How to check your position

• Ask the local authority or fostering service to confirm the type of placement and the purpose of each payment.
• Check whether you are formally approved as a foster carer and whether the payment is made under that fostering arrangement.
• Read any payment schedule, agreement, court order or letter explaining the support.
• Keep payment records and documents showing how amounts were calculated.
• Check the current HMRC guidance on foster care and qualifying care relief.
• Use a qualified tax adviser if the arrangement includes several payment types, retrospective payments, more than one child or another source of self-employed income.

Tax rules and local authority payment schemes can change, so written confirmation is preferable to relying on an informal description of the allowance. A fostering service or kinship support team can help explain the arrangement and identify the documents you need, while HMRC or a qualified tax adviser can confirm how it should be reported in your individual circumstances.