Are you a registered foster carer wondering whether you need to register as self-employed and how much tax you need to pay? Then this guide is for you! Here you’ll discover how tax works for foster carers, which unique tax allowances exist that help reduces tax bills and how self-assessment works. I’ll also explain some key elements for keeping tax records and show you examples you can refer to.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
Table of contents
- 1. Are Foster Carers Employed or Self-Employed?
- 2. What Tax Do Foster Carers Pay?
- 3. What Counts as Taxable Income for Foster Carers?
- 4. The Simplified Method for Foster Carers Taxes
- 5. Examples of Calculating the Qualifying Amount for Foster Carers
- 6. Allowable Expenses for Self-Employed Foster Carers
- 7. How to Calculate Tax For Self-Employed Foster Carers Pay
- 8. Keeping Tax Records
- 9. How To Fill In Your Foster Carers Tax Return
- 10. Should Foster Carers Pay Class 2 National Insurance?
1. 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 income tax or National Insurance deducted. However, 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. You can do this by filling in a tax return online by 31 January each year (which you’ll find when you signed into your .GOV account with your HMRC user ID).
2. What Tax Do Foster Carers Pay?
Foster carers pay self-employed tax on their taxable income after deducting expenses and any tax reliefs and allowances they are entitled to. That means registered carers will pay income tax as well as Class 2 and Class 4 National Insurance.
3. What Counts as Taxable Income for Foster Carers?
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 & National Insurance on your total care receipts less your actual expenses and capital allowances.
4. The Simplified Method for Foster Carers Taxes
The simplified method lets you claim a fixed deduction against your taxable income, instead of your actual expenses. This tax-free allowance is called the “Qualifying Care Relief“.
4.1 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
4.2 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.
4.3 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.
4.4 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. You’ll also need to find a way to separate what you can claim for and what you can’t, for costs like:
For these reasons, many foster carers opt for the simplified method to make their taxes easier and avoid keeping receipts.
5. Examples of Calculating the Qualifying Amount for Foster Carers
Lucy earns £23,000 in taxable foster care payments during the tax year 2021/2022 (6 April 2021 to 5 April 2022). 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 2021/2022. 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 (£12,570 for 2020/2021) against this and will not need to pay any tax.
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 registered foster carers on 1 January 2021. 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).
6. 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 business bank 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.
7. 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. That is, if you choose to use the simplified method or your actual expenses.
You’ll pay income tax at the same rate as everyone else (based on all your types of income), so for the 2021/2022 tax year you can earn up £12,570 tax-free. After this, you’ll pay income tax at 20% on your earnings up to £50,270 and 40% over that amount, until you reach £150,000 and have to pay 45%.
|Personal allowance 0%||£12,570||£12,570|
|Basic rate 20%||£12,570 to £50,270||£12,570 to £50,270|
|Higher rate 40%||£50,271 to £150,000||£50,271 to £150,000|
|Additional rate 45%||over £150,000||over £150,000|
Class 2 National Insurance
You’ll pay Class 2 National Insurance when your business profits reach a certain level (known as the small profits threshold). Class 2 National Insurance is paid at a fixed amount and the current rates are:
|Small profits threshold – no NICs below this threshold||£6,725||£6,515|
|Class 2 National Insurance||£3.15 per week||£3.05 per week|
Class 4 National Insurance
You’ll pay Class 4 National Insurance when your business profits again reach a certain level (known as the small profits threshold). The current Class 4 National Insurance rates are:
|Lower profits limit (no NICs below this threshold)||£11,909||£9,568||£9,500|
|Upper profits limit||£50,270||£50,270||£50,000|
|Rate between lower and upper profits limit||9.73%||9%||9%|
|Upper profits limit||£50,270||over £50,270||over £50,000|
|Rate above upper profits limit||2.73%||2%||2%|
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.
8. Keeping Tax Records
As a self-employed foster carer, you are legally required to keep business records and paperwork that support all your income and expenses you enter onto your tax return for 6 years. That way if HMRC wants to investigate 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.
9. How To Fill In Your Foster Carers Tax Return
Once a year, you’ll need to report your earnings to HMRC using a tax return. This is what is known as ‘self assessment‘. You’ll need to file your tax return by 31 January each year and most likely you’ll do this online. You can fill out a paper version but you’ll need to get it in sooner, in October instead of January.
One tax return covers one tax year. So your return due by 31 January 2023 will cover your income and expenses for the tax year 2021/2022.
9.1 Self-Assessment for Foster Carers
You’ll need to enter your income and expenses in regards to foster caring as part of the self-employment section of your tax return. Here’s some tips when it comes to filling in your tax return:
Description of Business: Enter “Qualified Carer”
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.
10. Should Foster Carers Pay 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, the 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.