Foster Carer Tax Return: Example & Exemptions

Foster carers are required to follow specific tax guidelines and are entitled to unique tax allowances that help reduce their overall tax bills. For many, however, filling out tax forms can be puzzling. The endless figures, numbers, phrases, and thresholds can quickly turn a simple task into a chore.

If you’re a foster carer trying to figure out your foster carer tax allowance, you’re not alone! Taxes can be a tricky territory to navigate, with many people wondering – is foster care income taxable? To help, we’ve prepared a guide to help you better understand foster carer tax returns.

If you have been employed before, you’ll know your taxes and National Insurance contributions are automatically taken out of your wages each time you are paid.

Self-employment works differently. Instead, you will need to contribute your tax and National Insurance yourself as it will not be taken automatically. As a foster carer that is self-employed, you may have to pay:

Class 2 National Insurance contributions will be added to your tax bill if your taxable income from fostering is above a certain amount (£6,356 in 2019/20) or if you pay it voluntarily.

As to Class 4 National Insurance Contributions, you will likely only need to pay this if your annual taxable income is over £8,632. When you use HMRC’s online tax return form, it will figure out how much (if any) Class 4 NI contributions and Income tax you will need to pay.

You are responsible for paying your own National Insurance and Income Tax as a foster parent. But you may not pay Income Tax or NI contributions on all, if any, of the income you earn due to Qualifying Care Relief.

The Qualifying Care Relief scheme calculates the tax threshold specifically for the foster carer(s) in one household. Your tax relief amount will depend on several elements specific to your own fostering circumstances. It takes the carers’ total fostering income into account and determines whether a foster carer needs to pay any tax. Foster carers usually benefit greatly from this scheme as, for many, their total fostering income is below their tax threshold and therefore, they won’t need to pay any tax.

• A fixed sum of £18,140 per household (remember: this is not per carer- this is for a full year per household. If you have not been registered as a foster carer for a full tax year this will be calculated out on a pro-rata basis).

(To adjust the figure, times the number of days you’ve been an approved foster carer by £18,140. Then divide by 365, the number of days in a year).
(Divide by 366 during a leap year)

• A weekly tax relief allowance for each young person you care for (depending on their age):
  – £375 for children under 11 years

– £450 for children aged 11 or over

Each week starts on a Monday and ends on a Sunday, a part of a week counts as a full week.

Anything that you earn above this will be taxed. If there is more than one carer in your household, you share this fixed amount.

There are two different ways to find out if you need to pay tax. These are the Simplified Method or the Profit Method.

The simplified method

The simplified method is commonly used amongst foster carers and recommended by accountants. If your total care receipts are more than your qualifying amount, you can use the simplified method. This means that you pay tax on your total receipts from caring, minus your qualifying amount.

Once you have done this, you will need to fill in a tax return. In your tax return, you will be able to claim your qualifying foster care relief, as well as include your total receipts and your qualifying amount, on the ‘Self-employment (short)’ pages.

The profit method

If your fostering income is over the qualifying amount and you want to use the profit method to calculate out what you owe, you will need to keep receipts for everything you pay for. You need to fill in a tax return and include your receipts and expenses on the ‘Self-employment (full)’ pages. You cannot claim qualifying care relief.

You are advised to seek tax advice to make sure you are claiming for everything correctly.

Please note – Your fostering income will usually reflect the cost of some of the things you pay for, but you will need to separate what you can claim for and what you cannot.

Fostering income is intended to cover costs such as:

Each foster carer’s qualifying amount will be different, as you will have cared for a different number of children, for differing lengths of time. Check out this foster carer tax return example using the simplified method below.

Once you have registered with HMRC as self-employed, and once you have submitted your Self Assessment tax return, you will have a few options for paying your tax.

You will be able to pay via online or telephone baking, direct debit card transfer, or by cheque in the post.

• HMCR has a handy online guide that takes you through each tax element for foster carers, step by step.
• FosterTalk provide a comprehensive service about tax and accountancy for their members.
• The Fostering Network answer some FAQs about foster carer’s tax.
• Find out more about being a foster parent and working full time or part time.

Taxes can feel baffling, but remember you are not alone in feeling this way!

At Compass, we provide wrap-around support for our foster carers with generous allowances,  advice and guidance. If you have any questions about becoming a foster carer with us, use the buttons below.

This guidance was last updated in July 2022. Compass Fostering are not qualified tax advisors. Should anything written here be in contradiction of latest guidance and allowances from HMRC then the HMRC guidance should be considered correct.