Tax and National Insurance for foster carers

The very thought of tax and national insurance may sound complicated, but when you know what the rules are as a foster carer, it’s fairly straightforward.

If you are thinking about becoming a foster carer, and we hope you are, we’ve pulled together a few FAQs to help you understand the tax implications.

Will I be self-employed? If so, what tax will I pay?

All foster carers are considered as self-employed for tax purposes. There is even a specific tax scheme that has been set up by HMRC for foster carers called Qualifying Care Relief.

Qualifying Care Relief works by calculating a tax threshold that is unique to your fostering household. It takes account of your total fostering payments and assesses whether you need to pay any tax from fostering or not.

You may find that your total fostering payments are below the tax threshold and you may not need to pay any tax. How much you pay will depend on your earnings as a foster carer – this will vary depending on the number of children you foster within a year and the allowances you receive for each child. You may also have other forms of income too, which could alter your taxable income.

Do I need to register with HMRC?

Yes. You must register with HMRC regardless of your type of fostering and the level of income you receive from fostering.

Will I have to complete a Self-Assessment tax return?

Once registered with HMRC, you will be asked to complete a Tax Return yearly for the period 6 April to the next 5 April. You will need to ensure that you submit your Tax return by 31 January (if you are filing online) following the end of the tax year to prevent late filing penalty charges.

Everyone who is self-employed must also register with HMRC to pay Class 2 National Insurance Contributions (NICs), much like any job. Whether you must pay Class 2 NICs will depend on how much you earn from fostering.

In summary, if your taxable profits are over £8,632 for 2019/20, Class 2 and Class 4 NICs will both apply. You will need to complete a Self-Assessment tax return every year - even if your income from fostering is covered by Qualifying Care Relief.

How does the Qualifying Care Relief work?

Qualifying Care Relief works by providing a tax free amount that is deducted from your total fostering payments to work out whether you need to pay tax on your fostering income.

The Qualifying Amount is made up of two parts:

1. A fixed rate of £10,000. This is available to you if you have been a foster carer for the entire tax year. If you have been a foster carer for part of the tax year, the amount is calculated on a pro-rata basis.
2. The second is a weekly rate of £200 per week per child under the age of 11 and £250 per week per child aged 11 or over.

To qualify for Care Relief, you must work out the total income you received from fostering, including any income, expenses, and mileage.

If your total fostering income is less than the Qualifying Amount, then you will not need to pay any tax. If your income is over the Qualifying Amount, the excess is treated as your profit (taxable income).
If you have any fostering income above the Qualifying Amount, you can also use your personal allowance (if it has not already been used against other income within the same tax year – e.g previous employment).

Thankfully, HMRC’s self-assessment portal is easy to use and there are lots of helpful guides for foster carers on the HMRC website, including:

• A help-sheet 236 as a guide to Qualifying Care Relief
• Online support pack for foster carers
• HMRC online foster carer forum
• Videos and webinars for self-employed people
• Webinar for foster carers’ tax returns

I am already registered as self-employed. Do I have to register again for my fostering?

No. However, it is best to let HMRC know that you are now fostering. You will also need to remember that when you complete your Self-Assessment tax return, you must complete the section on your fostering income.

What receipts or records do I need to keep?

As a foster carer, you can complete your tax return using Qualifying Care Relief which does not require you to keep receipts, unless you are caring for a child with specialist needs. You will, however, need to keep remittance slips or an annual summary.

You must also keep a secure log of when children were in your care, including respite (where a child may only have stayed with you for one night) and the ages of each child.

You will need a record of your total income. This should include all general fostering allowances, reward payments, holiday payments, mileage, school uniform and living allowances – everything your fostering service has paid to you in the tax year.

If you are caring for a child with specialist care needs, you may be able to claim exceptional expenses and should keep receipts or records of these. Our team will be able to let you know if you will qualify for this.

We hope you have found our FAQs helpful. Of course, if you have any questions about fostering, we’d welcome a chat with you.