For many, filling out tax forms can be a puzzling time. Endless numbers, phrases and thresholds can quickly turn a simple task into a chore. We know that tax can be a tricky territory to navigate, so we’ve prepared a guide to help you better understand foster carer tax returns.
Foster carers are required to follow specific tax guidelines and are entitled to unique tax allowances that help reduce their overall tax bills. Whether you are a new carer, a seasoned carer or are thinking about fostering and how your earnings will affect you, this guide will help you get to grips with foster carer taxes.
Do Foster Carers Pay Tax?
Foster carers’ allowance is taxable as it is considered an income. However, there are exclusive tax schemes called Qualifying Care Relief in place, meaning you can receive an amount of your allowance tax free.
Foster carers are counted as self-employed, so you will need to register as self employed with HMRC for ‘Self-Assessment’ as soon as you have been approved by your fostering agency. Each year a self-employed tax return will need to be completed, this will include details of your fostering income and any other income details if you get these too. A tax year runs from 6th April to the following 5th April.
HMRC will charge you a penalty if you don’t let them know you are self-employed within six months of the end of the tax year in which you are approved as a carer. This date will be 5th It’s advised you make HMRC aware you are self-employed as soon as possible to avoid penalties and confusion.
If you have previously been employed by someone else, your payslip would be sent to you showing how much tax and National Insurance has been automatically taken out of your wages. Self-employment works differently as you will be contributing your own tax and National Insurance yourself. As a foster carer, you may have to pay:
- Income Tax: how much you pay depends on your ‘profit’ you make.
- Class 2 National Insurance: a set weekly amount, paid twice yearly or monthly by direct debit.
- Class 4 National Insurance: also depending on how much ‘profit’ you generate. (You won’t pay Class 4 NI if your ‘profit’ is below the threshold).
When you use HMRC’s online tax return form, it will work out how much, if any, Class 4 NI contributions and Income tax you will need to pay. As someone who is self-employed, you will be registered for Class 2 National Insurance contributions.
What does HMRC mean by ‘profit’?
When you are classed as self-employed you need to keep a record of all the money you receive- usually referred to as ‘business income/turnover’. This will be your regular fostering allowance that is made up of your professional fee for yourself and day to day living allowance for your foster child.
If you earn anything else on top of this, for example if you become a Carer Recruitment Ambassador, take part in extra earning opportunities or have any other source of income you will need to declare it. When HMRC refer to profit it is the money that you yourself make from fostering.
There are two different ways to work out if you need to pay tax. What is referred to as the Simplified Method or the Profit Method.
- The simplified method (most commonly used by foster carers)
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.
You need to fill in a tax return, claiming qualifying care relief, and include your total receipts and your qualifying amount, on the ‘Self-employment (short)’ pages.
- The profit method
If your expenses are more than your qualifying amount, you might prefer to use the profit method. If you do, you will have to keep detailed records of your income and outgoings.
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.
How much is a foster carer’s tax allowance?
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.
Qualifying Care Relief
The Qualifying Care Relief scheme works out 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 payments 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 payments are below their tax threshold and therefore, they won’t need to pay any tax.
- A fixed sum of £10,000 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 worked out on a pro-rata basis).
(To adjust the figure, times the number of days you’ve been an approved foster carer by £10,000. 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):
– £200 for children under 11 years
– £250 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.
How do I work out my qualifying amount?
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. This example is with the most common method for working out what tax you will need to pay, the simplified method.
Let’s see some examples:
If you are not a foster carer for a full year, your £10,000 fixed amount will change:
Tim started fostering on 28th August, the number of days from 28th August to 5th April is 221. His fixed amount will be:
221 (days fostering) x £10,000 (fixed amount) ÷ 365 (days in the year) = £6,055 (if your answer gives a long decimal round it up to the next £).
You will then add this total to your weekly amount you receive for the children in your care.
Tim had Emma, aged 8 in his care for five days, from Sunday until Wednesday. This is counted as two full weeks, so will be £400.
He also has a long-term placement, Dean a 14-year-old with him from 28th August.
Tim’s total payment from foster care this year was £12,880.
Tim’s qualifying amount would be
Fixed amount: £6,055
Dean (32 x £250): £8,000
Emma (2 x £200): £400
Total qualifying amount
Therefore, Tim would not need to pay any tax or class 4 National Insurance, as his income from fostering is below the threshold.
If your fostering income is over the qualifying amount and you want to use the profit method to work out what you owe, you will need to keep receipts for everything you pay for. You are advised to seek tax advice to make sure you are claiming for everything correctly.
Your fostering payments will usually reflect the cost of some of the things you pay for, so you will need to separate what you can claim for and what you cannot. These are costs such as:
- Household costs (bills)
The simplified method is commonly used amongst foster carers and recommended by accountants.
When should I pay my tax returns?
You will be required to fill out a tax returns form for HM Revenue and Customs regardless of whether you need to pay tax on your earnings or not. The self-assessment returns form can be completed by paper by 31st October or online by 31st January. The form can either be completed by yourself or an accountant if you prefer.
Make sure you send your tax return in on time. If your tax return is late, HMRC can charge you a penalty.
Taxes can feel baffling, but remember you are not alone if you need any questions answered. At Compass we provide brilliant support for our foster carers with generous fostering allowances, and advice and guidance. If you have any questions about becoming a foster carer with us, please get in touch by phone on 0800 566 8317 or online here.
- 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.
CAVEAT: “This guidance was last updated in April 2020. 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.”