For many, 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 allowance taxable?
To help, 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 foster 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?
So, is foster care money taxable? The answer is yes, but foster carer tax is not quite as straightforward as that.
Foster carers’ allowance is technically taxable as it is considered an income. If and how much tax you pay as a foster carer depends on various factors, including the total amount of fostering payments you receive in a tax year.
However, most foster carers pay little to no tax on their fostering payments. This is thanks to an exclusive tax scheme called Qualifying Care Relief. This scheme means foster carers can receive an amount of their allowance completely tax free, which is why it’s commonly referred to as the foster carers tax allowance. You can find out more about Qualifying Care Relief further down.
For many foster carers, their fostering allowance is below their tax threshold, meaning they do not have to pay any tax. However, it is important that you register with HMRC, and submit an annual tax return, even if you don’t need to pay tax on your payments.
Are Foster Carers Self-Employed?
Foster carers are considered self-employed. This means that, as a foster carer, you will need to apply with HMRC for ‘Self-Assessment’ as soon as you have been approved by your fostering agency. This will register you as self-employed.
If you were already registered as self-employed, you do not need to register again. However, we advise you to contact HMRC to let them know you have begun fostering.
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. We advise you make HMRC aware you are self-employed as soon as possible to avoid any penalties.
When Should I Submit a Tax Return?
Each year a HMRC foster carer tax return (otherwise known as a Self Assessment tax return) will need to be completed. This declares your total ‘profit’ for the year and any tax you need to pay on it.
As a foster carer, your tax return will include details of your fostering income and any other income you receive throughout the tax year.
A tax year runs from 6th April to the following 5th April. Each year, HMRC will write or email you to inform you that you are required to complete a Self Assessment tax return. The return can be completed by paper (by 3st October) or online (by 31st January).
Make sure you send your tax return in on time. If your tax return is late, HMRC can charge you a penalty.
What Does HMRC Mean By ‘Profit’?
When HMRC refer to ‘profit’, they are referring to the money that you yourself make from fostering. As foster carers are classed as self-employed, you need to keep a record of all the money you receive. This is usually referred to as ‘business income/turnover’.
This includes 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 as profit.
How Does Self Assessment Tax Work?
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:
- 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).
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.
What is 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 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 calculated 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 Can I Work Out if I Need to Pay Tax?
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 (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.
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 simplified method is commonly used amongst foster carers and recommended by accountants.
- 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 payments 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 allowances are intended to cover costs such as:
- Household costs (bills)
How Do I Find 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. Check out this foster carer tax return example using the simplified method below.
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.
How Do I Pay my Tax?
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 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.
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.