Foster carers perform an invaluable role in modern society and many thousands help bring up children across the UK, providing them with a safe and loving home.
Foster carers are considered self-employed when it comes to tax purposes. You will need to register with HMRC accordingly and fill in a self-assessment tax return every year. Calculating how much you can earn as a carer and what your tax liability could be is an important consideration.
To help, the team at VW Taxation take a closer look at financial issues, such as fostering allowance and tax credits, and how these might affect your situation.
Do foster carers pay tax?
Technically, yes. Foster carers are treated as part of the workforce and are therefore liable to pay tax on their earnings.
The good news is that the tax arrangements, credits and allowances are highly beneficial and designed to encourage individuals to participate. This generally means that many foster carers do not pay tax on their earnings.
If someone is acting as a foster carer but also works either part or full-time, their income from that job is taxed in the normal way. Foster carers are normally given an allowance or financial payment for looking after a child, whether they are acting through a private agency or local authority.
Is foster care income taxable?
The specific tax scheme for foster carers is called Qualifying Care Relief which essentially creates a fairly beneficial threshold that is tailored to the particular household. If your earnings are below this threshold, then you do not need to pay tax.
As they are classed as self-employed, foster carers also have to pay Class 2 National Insurance Contributions (NICs). If there is no taxable profit, however, or you do not exceed the threshold by more than £6,365 from your fostering activities, you do not need to pay these contributions.
Are foster carers classed as self-employed?
Yes. You will need to register with HMRC as self-employed and fill out a self-assessment each year for your paid role as a foster parent. You need to complete that self-assessment even if you do not think you have any tax to pay for a particular year.
It’s easy to sign up online as a self-employed person. Once you do, you will be given a unique code and login for HMRC’s self-assessment portal.
- Your tax return needs to be completed, and any tax or NICs paid, by 31st January each year.
- Each tax year runs from April 6th to April 5th.
- Once you fill in the online form, it goes to HMRC to be checked and the amount of tax and NICs to be paid are automatically calculated.
Do you pay tax on fostering income?
Whether a foster parent pays tax on their fostering income will depend on several different factors. Many do not pay tax because their earnings come under the generous thresholds. The amount they get paid also depends on many different factors.
These include location, whether you are using a private or local authority service, the age of the child or children, whether they have specific needs and your skills or experience. The average weekly income from fostering through a private agency is around £450 for a single child.
What is the tax allowance for foster carers?
Each household that offers foster care gets a yearly tax allowance of £10,000. That means you need to earn more than this from your foster caring before you potentially have to pay any tax. If you have been approved as a foster care during the tax year, this will be calculated on a pro-rata basis.
On top of this, foster carers also get an individual tax allowance:
- If the child is under 11, this is £200 per week.
- If the child is over 11, this is £250 per week.
Whether you pay tax or not will depend on how much you earn and whether you exceed the threshold. If you are looking after a child under 11 for 52 weeks, for example, then you will have a threshold of £10,000 plus (200 x 52) £10,400 = £20,400 before you pay tax.
Do I have to pay tax on fostering allowance?
If you exceed the threshold for your allowances then you will need to pay tax on what is deemed as profit. Most agencies will work with foster carers to minimise the amount of tax due and the vast majority do not pay any tax at all.
Can foster carers claim Carers Allowance?
Many foster parents do not realise that they can also claim additional benefits such as carers allowance and disability living allowance. If a child in your care has specific needs, for example, if they have mobility or mental health problems, you can claim in addition to the fostering allowance.
The fostering tax allowance is normally not taken into account as long as it is below the threshold. These are assessed benefits and need to be applied for separately. Your agency or local authority will be able to help you decide what you should apply for and how much you are entitled to.
What foster care expenses are tax-deductible?
In ordinary self-employed assessments, you can deduct for any financial outlay you had to make concerning your business. For example, a builder might have to buy certain tools, the cost of which they can offset against their tax return.
For foster carers, the payments that are made from agencies and local authorities are designed to cover all your expenses such as providing clothing and food for the child so deductions don’t generally apply.
Does fostering allowance affect tax credits?
Because you are classed as self-employed, the amount you earn over any threshold will be taken into account when working out tax credits. It’s important to seek advice in this area and whether you qualify.
Can foster parents claim child tax credits?
You can only get a tax credit for your own child if you have one, and not for a foster child for whom you are being paid to provide care.
Do you get taxed on fostering allowance?
The amount of fostering allowance will vary because of several factors including whether you are working through an agency, who generally pay more or local authority. In most cases, earnings for foster carers tend to fall below this threshold.
If you are a foster parent or just starting and need help completing your self-assessment with the HMRC or would like advice, contact the expert team at VW Taxation in Portsmouth today.