Are emergency foster care payments taxable?

The tax treatment of emergency fostering income depends on your total fostering receipts, the relief available to you and your wider financial circumstances. HMRC does not create a separate tax category simply because a placement was arranged at short notice.

Foster carers are generally treated as self-employed for tax purposes. This means you assess the income received for providing foster care rather than treating it as ordinary employment pay. The relevant receipts may include payments described as fees, allowances, maintenance payments, retainers or emergency placement payments. The organisation making the payment should be able to explain what each part represents.

How Qualifying Care Relief is calculated

Qualifying Care Relief, often called the foster carer tax scheme, is designed to recognise the costs involved in looking after children in your home. The calculation normally includes:

• an annual fixed amount for the fostering household; and
• a weekly relief amount for each child placed with you, with the calculation affected by the child’s age.

The relief is set against qualifying care receipts when working out your taxable fostering profit. If your receipts are covered by the available relief, there may be no taxable fostering profit. If they exceed the relief, the remaining profit may need to be included on your tax return.

The calculation applies to your circumstances for the relevant tax year. This can make a difference where an emergency placement begins or ends part way through the year, where more than one child is placed with you, or where placements are made through different arrangements. Keep the payment information for each placement so that the figures can be allocated to the correct period.

Emergency payments and expenses

A payment connected with an emergency placement should not be assumed to be a reimbursement simply because it is described as an allowance. Whether a particular amount is a care payment, a genuine expense reimbursement or another type of receipt can affect how it is recorded. Ask the agency or local authority for a written breakdown if the payment statement is unclear.

If you use Qualifying Care Relief, you should not deduct the same fostering costs again as ordinary business expenses. Some carers may need to compare the available relief with their actual allowable expenses, particularly where their circumstances are unusual. A tax adviser can explain which method is appropriate and whether changing the method would affect the calculation.

Other income and tax responsibilities

Qualifying Care Relief applies to fostering income; it does not automatically remove tax due on other income. Employment earnings, self-employed work, property income, pensions, savings and investments may all need to be considered separately. Your personal allowance and other tax reliefs depend on your complete financial position, not only on fostering payments.

National Insurance is a separate issue from income tax. Your liability can depend on your self-employed status and the level of profit calculated for the year, so it should be checked alongside any Self Assessment obligations.

Information to keep

• payment statements showing the date, amount and type of each receipt;
• placement dates and the number and age of children cared for;
• records showing whether a payment was a fee, allowance or expense reimbursement;
• relevant invoices, receipts and bank records; and
• tax returns, calculations and correspondence relating to your fostering income.

Use these records to check the figures supplied by the agency or local authority before completing a tax return. HMRC’s rules and the rates used in the relief calculation can change, so confirm the current position directly with HMRC or obtain advice from a qualified tax adviser who understands foster carer taxation.