I’ve updated this guide on 6 November 2020
There are special rules to follow when it comes to tax for foster carers because they are entitled to unique tax allowances that help reduce their tax bills. This guide covers how your taxes are works, the records you need to keep and what to do when it comes to filling out your tax return.
Are Foster Carers Employed or Self-Employed?
Foster carers are considered self-employed for tax purposes because the money they get paid for example, by local authorities, has no tax or national insurance deducted. But these payments are considered taxable income.
In order to pay tax on this income, HMRC requires foster carers to register as self-employed and work out their own taxes using the process of self-assessment to declare their taxable income once a year by filling in a tax return online 31 January.
How Much Tax Do Foster Carers Pay?
Foster carers must pay income tax as well as class 2 and class 4 national insurance on their taxable income after deducting expenses (keep reading for the rules on this), tax reliefs and allowances (which vary between individuals depending on their circumstances).
How to Work Out Your Taxable Income
Your taxable income means everything you are paid from things like:
- Local authority payments;
- Reward payments.
Once you have this figure you have two ways to proceed with declaring this income. It’s totally up to you which one you choose:
- Simplified Method where you pay tax on any amounts you receive less a tax-free allowance called the “Qualifying Amount” instead of claiming your actual expenses;
- Profit Method where you pay tax on your total care receipts less your actual expenses and capital allowances.
Simplified Method for Foster Carers Taxes
The simplified method lets you claim a set amount against your taxable income, instead of your actual expenses. This tax-free allowance is called the “Qualifying Care Relief“.
How Much is Qualifying Care Relief?
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. But they must still fill in a tax return 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;
- 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 you’ll need to find a way to separate what you can claim for and what you can’t on costs like:
- Household costs like light and heating
For these reasons many foster carers opt for the simplified method, to make their taxes easier and avoid keeping receipts.
Here’s some examples of working out the Qualifying Amount:
Lucy earns £23,000 in taxable foster care payments during the tax year 2018/2019 (6 April 2018 to 5 April 2019). During the tax year, she was responsible for looking after a 9-year-old for the full year and a 7-year-old for 20 weeks. She opts to use the simplified method for working out her taxes.
Lucy’s qualifying amount is made up as follows:
Child 1 (£200 x 52 weeks)
Child 2 (£200 x 20 weeks)
Total Qualifying Amount
Lucy’s total foster income is less than her qualifying amount so they are exempt from income tax and national insurance.
Lucy earns £26,000 in taxable foster care payments during the tax year 2018/2019 (6 April 2018 to 5 April 2019). During the tax year, she was responsible for looking after a 9-year-old for the full year and a 7-year-old for 20 weeks. She opts to use the simplified method for working out her taxes.
Her qualifying amount is still £24,400 as we worked out in Example 1 but her earnings now exceed this amount. She will pay tax on the difference between her total receipts of £26,000 and a qualifying amount of £24,400, which is £1,600. Lucy has no other income during the year and can use her personal allowance (£11,850 for 2018/2019) against this and will not need to pay any tax.
The circumstances are the same as above, but Lucy has other forms of income so has no personal allowance remaining. Lucy will need to pay income tax on the difference of £1,600 between her receipts of £26,000 and a qualifying amount of £24,400. Lucy will need to pay tax at 20% of £320 calculated as £1,600 x 20%.
The fixed amount of £10,000 is per household. So if there is more than one carer in your household you will share the fixed amount. Lucy and her partner became a registered foster carer on 1 January 2019. The tax year ends on 5 April 2019. The fixed amount Lucy is entitled to is reduced to £5,000 for the full tax year (£10,000 split equally between her and her partner).
It is then reduced to £1,301.37 because she was a carer for less than one year. That’s worked out as the fixed amount prorated for the number of days she was actually a carer during the tax year (95 days /365 days *£5,000).
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.
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 to Calculate Tax For Self-Employed Foster Carers Pay
The amount of tax and national insurance you’ll pay will depend on how much money is left over after deducting the qualifying amount if you choose to use the simplified method or your actual expenses.
Income tax starts at 20% on all your income (not just from fostering) over £12,500 and 40% over £50,000. Class 2 national insurance is paid as a set weekly amount when your earnings go over £6,475 and Class 4 is worked out as 9% on your earnings over £9,501.
When you fill in your tax return online, HMRC will automatically calculate how much tax you owe for you based on the information you enter.
Keeping Tax Records
As a self-employed foster carer, 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 filling in 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 (take a look at Starling);
- 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 and do your bookkeeping.
Self-Assessment for Foster Carers
Your tax return is due by 31 January each year and you need to declare your income for the previous tax year. So your self-assessment tax return for 2019/2020 is due by 31 January 2021.
You can find out how to access your return in this guide and you’ll need to include your fostering income in the self-employment section. Here are some handy tips to help get you started if you are using the simple method (don’t forget to favourite this page for tax-time!):
Description of Business
Enter “Qualified Carer”
Did you use the cash basis?
The cash basis for self-assessment is a simpler way to record your business income and expenses if you are self-employed. It can be advantageous to foster carers who are self-employed since you will only pay tax on the money you have actually been paid.
As a foster carer using the simplified method, the figure you need to enter for turnover depends on whether you have exceeded the qualifying amount or not.
If You Earn Less Than the Qualifying Amount
If the qualifying amount wipes out your income, then you can enter zero in the turnover box and leave the rest of the form blank.
If You Earn More Than the Qualifying Amount
If your fostering payments, allowances and reward payments exceed the qualifying amount you are entitled to, then you may have to pay tax and national insurance. Enter the difference between your earnings and the qualifying amount in the turnover box.
You don’t need to enter anymore information in the self-employment section.
Paying Class 2 National Insurance
Class 2 national insurance protects your access to state benefits like the state pension. But when you’re self-employed you don’t actually need to pay it if your income is below the threshold. If you are a foster carer, chances are your qualifying amount will wipe out your income meaning you don’t need to pay class 2 NI.
Not paying tax may be tempting. But falling behind with Class 2 NI could show up as a missed payment on your record, negatively affect the amount of state pension you are entitled to when the time comes to draw it. For that reason, some people choose to pay it voluntarily.
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- Government Support For the Self-Employed During Coronavirus – Find out about the schemes available, which ones you are eligible for and how to claim;
- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- How to Fill In Your Tax Return Online – In this step-by-step guide, you’ll find everything you need to know to fill in your tax return online and beat the HMRC deadline.
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
- VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.