Financial Information for Foster Carers
Financial matters for foster carers can be complicated. We produce a range of resources to help keep confusion to a minimum and find your way through the financial jargon. To help you find what you need, we have broken down this section.
Tax and National Insurance Contributions
Registering as ‘self-employed’ with Her Majesty’s Revenue and Customs (HMRC)
As a foster carer you are seen by HMRC as ‘self-employed’. If you are a new foster carer, the two key things you need to do straight away are to register as self-employed, as soon as you are approved by your fostering service, and to start keeping a record of the children you foster, the dates they are with you and their ages. If you don’t register with HMRC you may face a financial penalty.
You can register with HMRC by telephone, either by calling the HRMC Newly Self-Employed helpline on 0300 200 3504 or by filling in the paper form CWF1 (downloadable from HMRC’s website); or you can register online here: or you can register online on the following link.
It’s simplest to register online. If you do so you’ll automatically be prompted to send in your tax return, and already be set up to do so online.
Once you’re registered as self-employed you’re also automatically registered for Class 2 National Insurance contributions.
If you’ve never had to do tax returns before the process can feel daunting – but don’t worry, HMRC have done everything they can to make this process as simple and straightforward as possible.
Everyone (whether foster carers or not) gets an annual personal allowance (£11,500 for 17/18, £11,850 for 18/19) – an amount of income on which the Government takes no tax. In addition to the personal allowance, the Government provides qualifying care relief – a further allowance for foster carers who care for a looked after child, called your ‘qualifying amount’, on which foster carers pay no tax.
The qualifying amount is different for each foster carer, depending on how many children you’ve fostered, their ages, and how long you fostered them for within the tax year. Depending on your level of ‘qualifying amount’, you will probably find you aren’t required to pay any tax or national insurance on the income you earn from fostering.
HMRC have provided an excellent short film to get you started. This explains how to register, how to keep records for tax purposes, how to work out your qualifying amount, and the way you can work out whether you owe tax or N.I. to HMRC. Click on the link below and let Charlotte, a new foster carer, take you through the whole process.
Sending in your tax return
Once you are registered as self-employed, you’ll be asked to send in a tax return each year, covering the period 6 April the previous year to 5 April in the current year. You have until 31 October of the current year to send in a paper tax return, or until 31 January of the next calendar year to send in your tax return online. If you register online you will be sent email reminders to prompt you to send in your tax return on time.
Working out if you owe tax to HMRC
As a foster carer, there are two ways you can work out whether you owe tax to HMRC – the ‘simplified method’ and the ‘profit method’. The HMRC film explains both these methods in full.
Using the ‘simplified method’
Using the simplified method, you use the records you’ve kept during the tax year (including the length and ages of each placement you’ve had) to work out your ‘qualifying amount’ for that tax year.
Your ‘qualifying amount’ is made up of two parts – a fixed rate of £10,000 per annum (year 17/18 and year 18/19), if you have been a foster carer for the full tax year, or pro-rata if you only started part way through the tax year), and a weekly rate of £200 (year 17/18 and year 18/19) for every week you had a child under the age of 11 placed with you; and £250 (year 17/18 and year 18/19) for every week you had a child over the age of 11 placed with you. [A tax week runs Monday-Sunday, and any part of a week counts as a full week, so if a child stayed with you from a Thursday to Tuesday, that would count as two weeks for HMRC]. If you care for a disabled child you can add the additional expenditure this entails, for example on special equipment, to the qualifying amount.
Your fostering service should give you a statement after 5th April showing all the income you’ve received from fostering in the previous tax year. If the total income you’ve received from fostering that tax year (fees, allowances, birthday and Christmas allowances, mileage and any other expenses paid to you) is less than your qualifying amount, you have no tax to pay. Any income you earn above the qualifying amount is taxable and is regarded as your ‘taxable profit’.
Remember, if you have no other income (e.g. from any other employment), you also have your full £10,000 personal allowance to use, in addition to your qualifying amount from fostering.
Using the ‘profit method’
Using the profit method, you deduct your actual expenses spent on fostering from your fostering income for the tax year. It is usually only worth doing this if you have very high expenses connected with your fostering.
In practice, this method means you need to keep detailed records of everything you spend on fostering throughout the tax year and keep any receipts as evidence for HRMC. You need to be able to show what proportion of all your expenditure (bills, food shopping etc) was on fostering, which can be tricky to work out.
To reduce the administrative burden of this, HMRC may agree that you can keep detailed records of your expenditure on fostering over a shorter period and use this as an average monthly or weekly expenditure when filling in your tax return.
For any ‘profit’ made on your fostering income, remember you still have your personal allowance to take advantage of before tax is calculated, as long as you have no other income (eg from any other employment).
Special types of fostering and tax
If you privately foster a child (i.e. if you are paid directly by the parents of that child in a private arrangement with them), or if you provide family and friends care or short break/respite care for a child who is not ‘looked after’ by the local authority, payments you receive do not qualify for ‘qualifying care relief’. However, if the payments are made to you under Section 17 of the Children Act 1989 (support for children in need), they are still tax free.
HMRC use the term ‘shared lives’ to cover a range of other types of placements. With parent and child care, even if only the parent is ‘looked after’, you can still use ‘qualifying care relief’ for both parent and child on the payments made to you by the local authority. When a young person reaches 18, if the local authority pays for you to continue to care for them as a shared lives carer, or as staying put care, you can still use a version of ‘qualifying care relief’. See the government website here. http://www.hmrc.gov.uk/manuals/bimmanual/BIM52758.htm
If you have a special guardianship order or a residence order (and you are not the child’s parent or step-parent) any payment you receive is exempt from tax under the ‘qualifying guardians’ exemption. These payments are not treated as income from self-employment and you don’t need to declare them on a self-assessment tax return.
Foster caring and national insurance
All self-employed people must register to pay Class 2 National Insurance contributions, which are set at £2.85 a week for 2017/18 and £2.95 a week for 2018/19. When you register as self-employed with HMRC you are also automatically registered for national insurance.
You don’t have to pay Class 2 contributions if your profit is below a certain amount. You will need to apply for a ‘small earnings exemption’ (SEE) if your profit from fostering is below £6,025 in 2017/2018 or £6,205 in 2018/19 – but your entitlement to benefits and a state pension may be affected. You can apply for National Insurance credits to protect your National Insurance record in these circumstances. Get form CF411A from HMRC to get these credits.
You will need to pay the higher rate (Class 4) National Insurance contributions if your profits from fostering are over £8,164 in 2017.18 or £8,424 in 2018/19.
To find out more call the HMRC Self Employed National Insurance Contributions Helpline on 0300 200 3504
More guidance and resources on tax from HMRC
As well as the short film, HMRC have produced lots of helpful advice and guidance for foster carers. There are webinars specifically for foster carers, shared lives carers and those completing a tax return for the first time here https://www.gov.uk/government/news/webinars-emails-and-videos-if-youre-self-employed#8
You could also download record keeping apps supplied by the HMRC http://www.hmrc.gov.uk/softwaredevelopers/mobile-apps/record-keeping.htm
And for further general advice and information for foster carers on tax issues visit HMRC or call the HMRC Newly Self-Employed Helpline on 0300 200 3504
Last Update: January 5, 2019