Are foster to adopt payments taxable?

The tax treatment of foster to adopt payments depends on the legal basis of the payment and the stage of the placement. Money paid while you are approved and acting as foster carers is normally considered under the tax rules for foster care. Payments made after an adoption order, or payments described as adoption support or an adoption allowance, may be treated differently.

Before an adoption order is made, a foster to adopt placement is usually a fostering arrangement even though the intended long-term plan may be adoption. The allowance may therefore be included with your fostering receipts when working out whether qualifying care relief applies. This is separate from deciding whether the child will eventually be adopted.

Qualifying care relief is a special tax arrangement for approved foster carers. It provides a set amount of tax relief for qualifying care receipts, with an additional amount linked to the number and ages of children cared for. The limits and conditions can change, so you should use the current HM Revenue and Customs guidance when completing a return.

Where your qualifying care receipts fall within the applicable relief, there may be no taxable profit from the fostering activity. If receipts exceed the relevant relief, the excess may need to be included in your taxable income. The calculation can also be affected by whether you have other fostering income, more than one placement or another source of taxable income.

Not every payment connected with fostering or adoption should automatically be treated in the same way. For example, an amount described as an adoption allowance, a contribution towards a particular expense or a payment made after an adoption order may have different rules. The wording in the agreement and the organisation making the payment are important. Ask for a written explanation of:

• what the payment is intended to cover;
• whether it is being paid under fostering or adoption arrangements;
• the period to which it relates;
• whether it includes reimbursements for specific expenses; and
• which records or tax documents you should retain.

Keep payment statements, placement dates, agreements and receipts for relevant expenses. Records are useful even where you expect qualifying care relief to cover the receipts, because HMRC may require you to demonstrate how the figures were calculated. Keep fostering payments separate from unrelated household income where possible, and do not assume that a payment is tax-free simply because it is called an allowance.

Your fostering service can explain how a particular foster to adopt payment has been calculated, but it cannot determine your personal tax liability. If you are unsure whether you need to register for Self Assessment, report the payments or account for tax on an amount received after an adoption order, check the current HMRC guidance or speak to a tax adviser who understands foster care and adoption payments.

Tax treatment is only one part of the financial picture. Ask the fostering service to explain how payments change during the move from fostering to adoption, which costs are covered separately and what happens if the adoption plan changes. This gives you a clearer record of which amounts relate to fostering and which relate to adoption support.