How Tax Works for Foster Carers. Foster Carers need to follow special tax rules and are entitled to unique tax allowances that help reduce their tax bills. This guide covers what you need to do, the forms you’ll need to fill out and how your taxes will work.
Being a foster carer is full of rewards but it doesn’t come without its challenges, including taxes.
Whether you are a new foster parent or been one for a while, getting to grips with the basics of taxes will make your life a little easier and avoid the risk of paying penalties.
This guide will help to alleviate any anxiety you may have around taxes, leaving you confident about:
- your tax status;
- what HMRC require you to do;
- how much tax you’ll need to pay;
- how to avoid HMRC penalties;
- the deadlines you need to plan for.
Are Foster Carers Employed or Self-Employed?
Foster carers must register as self-employed. But why and what does this mean?
If you have ever been employed by someone you’ll be familiar with getting a payslip that shows how much tax and national insurance have been taken out of your pay.
When you get paid as a foster carer there will be no tax or national insurance deducted. But these payments are considered taxable income, so somehow you need to pay tax on them.
That’s where self-employment comes in.
Self-employment is the term used for people who earn money that is untaxed, whether that’s from running their own business or fostering.
HMRC require foster carers to register as self-employed and use the process of self-assessment to declare their taxable income, work out their own taxes and pay that over to them.
This is all done using a self-assessment tax return form.
How to Register as a Self-Employed Foster Carer
You can register as self-employed online on the HMRC website. You can find the HMRC link you need and guidance on how to register as self-employed HERE.
If you already complete a tax return for another reason, then do not register again otherwise HMRC will expect two tax returns from you! Instead, fill out a CWF1 Form.
When Should You Register as a Self-Employed Foster Carer?
You’ll need to register as self-employed by the 5 October following the tax year that you went to the panel for approval.
So if you become an approved foster carer on 10 December 2018, you’ll need to register with HMRC by 5 October 2019.
Don’t wait to register, even if you have plenty of time. HMRC can have backlogs and suffer delays. There are also automatic penalties if you forget to register. So it is advisable to register as soon as you are approved.
When Do You Need to File Your Tax Return?
Once registered as self-employed you’ll need to fill out a self-assessment tax return form and pay any tax you owe by 31 January each year.
There are automatic penalties for missing this deadline, so make a note in your diary so you don’t forget it and don’t leave it until the last minute!
One tax return form covers one tax year (a tax year runs from 6 April to 5 April each year).
So your tax return for 2018/2019 is due by 31 January 2020 and needs to include all your earnings from 6 April 2018 to 5 April 2019.
How Much Tax Do Self-Employed Foster Carers Pay?
Once registered as a self-employed foster parent, you must pay income tax as well as class 2 and class 4 national insurance.
The amount of each of these depends on how much you get paid as a foster carer and how you choose to work out your taxable income.
Let’s look at an example of working out taxable income and then how much tax and national insurance would be charged for tax year 2018/2019.
Working out Taxable Income as a Foster Carer
Your taxable income as a foster care is everything you are paid. That’s things like:
- Local authority payments;
- Reward payments.
Since one tax return covers one tax year, you’ll need to add these up for the period 6 April 2018 to 5 April 2019.
Once you have this figure you have two ways to proceed with declaring this income and working out your tax. It’s totally up to you which one you choose:
- Simplified Method (recommended by most accountants) where you pay tax on any amounts you receive a tax-free allowance called the “Qualifying Amount”;
- Profit Method where you pay tax on your total care receipts less any expenses and capital allowances.
Simplified Method for Foster Carers Taxes
Under the rules of the simplified method, you do not claim for any expenses against your income.
You just add up the total amount of payments you receive for fostering and deduct a tax-free allowance from your taxable income, which acts as an estimate for your costs.
This tax-free allowance is called the “Qualifying Care Relief“.
How Much is the Qualifying Amount
The tax-free qualifying amount you are entitled to is made up of 2 things:
- a fixed amount of £10,000 per household and tax year;
- a weekly amount for each cared for child or adult:
- £200 for children under 11
- £250 for children aged 11 or over
- £250 for each adult
Who Can Claim the Qualifying Amount
The Qualifying Amount is available for:
- foster carers;
- shared lives carers
- kinship carers
- staying put carers (that’s where a young person who was fostered continues to receive care after their 18th birthday);
- parent and child arrangements – where the parent is aged 18 or over and the child is not a ‘looked after child’;
- supported lodging schemes (unless the relationship is more similar to that of a landlord and tenant rather than that between family members).
This relief does not cover any private arrangements you may have with friends or relatives. The adult or children placed with you must have been sent by:
- a local authority;
- health and social care trusts in Northern Ireland;
- a fostering service provider;
- a shared lives service provider.
If you are unsure whether you qualify for this relief, then contact your local authority.
If You Earn Less Than the Qualifying Amount
Self-employed foster carers who earn less than the qualifying amount do not have to pay any tax or class 4 national insurance.
They must still complete a self-assessment tax return form to declare their earnings even if they have no tax to pay in order to make a claim for the qualifying amount.
If you choose to use this method you cannot claim for any expenses that you may have paid for.
If You Earn More Than the Qualifying Amount
If you earn more than the qualifying amount, you’ll need to pay tax and national insurance.
You then have two ways to work out your tax:
- Pay tax on any amounts you received over and above the qualifying care amount (recommended by most accountants);
- Revert back to using the Profit Method for all your income where you pay tax on your total care receipts less any expenses and capital allowances.
The profit method can become quite onerous because you’ll need to keep receipts for everything you pay for and even pay for tax advice to ensure you are claiming expenses correctly.
In addition since your foster care payments generally reflect the cost of some of the things you pay for, you’ll need to find a way to separate what you can claim for and what you can’t. That’s costs like:
- Household costs like light and heating
For these reasons most foster carers opt for the simplified method, to make their taxes easier.
Allowable Expenses for Self-Employed Foster Carers
If you do choose to use the profit method then here are some of the typical allowable expenses you can claim against your taxes:
- Exceptional travel;
- Lessons (like music or sport);
- Accountants fees;
- Bank charges if you open up a separate account for your fostering income and expenses.
Watch out, if any of these costs are covered within your allowances then you will not be able to claim tax relief on the actual costs.
How Much Tax Do Self-Employed Foster Carers Pay?
The amount of tax you will pay depends on how much you earn, after deducting the qualifying amount if you choose to use the simplified method.
There are different income tax bands, so the amount you pay will depend on how much you earn from fostering AND any other income you have. But you will be allowed to deduct your personal allowance (tax-free earnings) before starting to pay tax.
The income tax bands for 2018/2019 are:
|Basic rate 20%||£12,501 to £50,000||£11,851 to £46,350|
|Higher rate 40%||£50,001 and £150,000||£46,351 to £150,000|
|Additional rate 45%||over £150,000||over £150,000|
You’ll need to pay class 2 and class 4 national insurance. Class 2 is a set weekly amount but Class 4 is worked out as a percentage of your earnings.
Class 2 National Insurance Rates
|Small profits threshold – no NICs below this threshold||£6,365||£6,205|
|Class 2 National Insurance||£3.00 per week||£2.95 per week|
Class 4 National Insurance Rates
|Small profits threshold – no NICs below this threshold||£8,632||£8,424|
|Class 4 National Insurance 9%||£50,000||£46,350|
|Class 4 National Insurance 2%||over £50,000||over £46,350|
Bookkeeping for Self-Employed Foster Carers
When you are self-employed you are legally required to keep records and paperwork that support all your income and expenses and hold onto them for 6 years. That way if HMRC ever asks how you arrived at the figures on your tax return, you’ll be able to show them evidence.
Your records include things like statements from your local authority and receipts for any expenses you may wish to claim, as well as bank statements.
The simplest ways to keep your records in order and speed up completing your tax return is to:
- Open a separate bank account so all your payments are in one place and help you budget for your tax bill (here’s how you can do that);
- Store your records and paperwork using a secure cloud-based storage system like google drive or Dropbox;
- Set aside time on a regular basis to check all your finances are in order.
Do You Need an Accountant to Do Your Tax Return?
Many people choose to complete their own tax returns, mainly because their tax affairs are fairly simple and they want to avoid the cost of an accountant.
When you’re self-employed, you are not legally required to hire an accountant to handle your tax affairs. Ultimately it is your responsibility to get your return in correctly and on time.
If you want to file your own tax return, then I’ve put together a step-by-step guide to help you complete your tax return. It includes a special section dedicated to self-employed foster carers.