Tax and foster care

Foster carers are usually exempt from paying Income Tax on the fostering allowance thanks to Qualifying Care Relief, also known as Foster Care Relief.

Fostering and Income Tax overview

In general, foster carers’ pay isn’t subject to Income Tax. This is because the Qualifying Care Relief tax scheme is quite generous, so you won’t normally have any taxable profit. Nevertheless, you will need to do a simple calculation at the end of each tax year to see what your tax threshold is for that tax year and whether or not you have gone over it. If you have, this is called taxable profit and you may have to pay tax.

Am I classed as employed or self-employed?

Since April 2003, all foster carers have been treated as self-employed. If this is all new to you, don’t worry – as a foster carer, your self-assessment tax returns are straightforward and we will offer you all the support you need. We’ve given you a brief outline below explaining how to work out if you have any tax to pay. Also see our Being a Self-employed Foster Carer page for more information about how to register and National Insurance Contributions.

What is Qualifying Care Relief?

Qualifying Care Relief (formerly called Foster Care Relief) allows foster carers to receive payments from their fostering service up to their tax threshold without being liable to pay any tax. It covers foster care, shared lives care, staying put care (for young people who are fostered after their 18th birthday) and parent & child care.

The benefits of Qualifying Care Relief

Because the Qualifying Care Relief threshold is generous, most National Fostering Group foster carers do not pay any tax at all. A small number pay tax on the amount they earn over the tax threshold.

Another benefit of Qualifying Tax Relief is that you don’t have to keep complicated accounts. At the end of the financial year (5th April), you work out if you owe any tax to HM Revenue & Customs (HMRC) using this simple calculation:

  1. Work out your Qualifying Care Relief tax threshold.
  2. Work out your total payments from National Fostering Group.
  3. Compare these two figures to work out if there is any tax liability.

Read on for more details on how to do this.

When I first became a foster carer, I was worried that I didn’t know anything about tax! But my social worker put me right at ease. Now, every year when the time comes, I don’t panic about filling in my tax assessment.

Lisa, National Fostering Group foster carer

Work out if you owe tax on foster care pay – in 3 steps

1. How to work out your tax threshold under Qualifying Care Relief

As a foster carer, when you submit a tax return at the end of the financial year you will have to work out your own unique tax threshold. Here is how to do it:

  • Every foster carer has a basic tax allowance of £10,000 per household per tax year, providing they’ve been approved for the whole of the tax year (6th April to 5th April). This is pro rata for foster carers approved part-way through the tax year.
  • Work out the individual child allowance using the following formula:
    • £200 per week per child aged under 11.
    • £250 per week per child aged over 11.
  • Add these figures (basic tax allowance plus individual child allowance) together to get your total tax threshold.

2. How to work out the total annual payments from your fostering service

You need to know how much National Fostering Group paid you during the tax year. This should be straightforward as we supply you with an end-of-year statement after the 5th April showing the total amount. It will include:

  • Fostering allowances
  • Bridging Retainer Payments
  • Expenses

3. How to work out your tax liability (if any)

Compare your totals: (1) your tax threshold and (2) total payments from National Fostering Group.

  • If your total (2) fostering payments are less than your (1) tax threshold, you have no Income Tax to pay.
  • If your total (2) fostering payments are more than your (1) tax threshold, you have an Income Tax liability. Any amount above the threshold is treated as profit.

Qualifying Care Relief example: how it works for Doug

Doug has had a foster child (age 7) on a long-term term placement for 52 weeks. He received a fostering allowance of £375 per week, which gave him an annual income of £19,500.

  1. Qualifying Relief Threshold: £10,000 + (£200 x 52 weeks) £10,400 = £20,400
  2. Payments from National Fostering Group: £375 x 52 weeks = £19,500
  3. Income Tax liability: £0

The first year we had to do our tax forms, I wasn’t sure where to start. However after meeting other carers, who have been fostering for many years, they helped us with the tax forms. You will always find someone in your support network can answer any questions you have.

Carol, National Fostering Group foster carer

An alternative to Qualifying Care Relief

If you prefer, you can ignore Qualifying Care Relief altogether and use a conventional profit and loss method to calculate your tax liability instead. However, this is more complicated and time-consuming and you’ll need keep every receipt relating to your fostering. You can get more information about Qualifying Care Relief from HMRC.

Personal tax allowance

The personal tax allowance states how much taxable income you can earn before you start paying Income Tax. The current personal allowance for most people is £12,500 (for 2018/19 it was £11,850). If your fostering payments exceed the Qualifying Care Relief threshold, you may be able to use your personal tax allowance to offset your tax liability. This is normally possible if you are a full-time foster carer with no earnings from elsewhere.

Couples fostering and main carers

If you are fostering as a couple, you can choose whether one of you will declare all of the fostering income as the main carer, or if you will split your income as a partnership. Usually, couples only register as a partnership when they both foster on a full-time basis and their household income from fostering takes them over the Qualifying Care Relief tax threshold. Not all couples do this though – it depends on what makes best financial sense in your particular situation. We can give you more information on this to help you make the right decision.

Self-employed accounting

Qualifying Care Relief has made the self-assessment tax returns process for self-employed foster carers much more simple. Some prospective foster carers say they are worried by the idea of keeping their own accounts, but there’s really no need to worry. It’s straightforward to work out your earnings and tax liability and there’s plenty of support if you need it. You shouldn’t need to employ an accountant, even if you make a profit. However, some foster carers with more complex finances may decide to employ an accountant.

Registering as self-employed with HMRC

Once you have been approved as a foster carer, you must register as self-employed with HMRC. You will need to do this within six months of the end of the tax year in which you were approved – which means by 5 October.

You can register as self-employed online, which is HMRC’s preferred method. Alternatively, you can complete a CWF1 form or call the Newly Self-Employed Helpline on 0300 200 3310. You’ll need to tell them your National Insurance number and when you were approved as a foster carer.

Once you are registered as self-employed you will be given a unique taxpayer reference (UTC) so you can use the online service to submit your self-assessment tax return online.

What is a ‘tax year’?

Unlike a calendar year, the tax year runs from 6 April of one year to 5 April of the next. We are currently in the tax year 2020/21. HMRC works retrospectively – in other words, while we are currently in the 20/21 tax year, you will need to submit information to HMRC about the previous tax year – 2019/20.

Further information and support

You can get more information from HMRC’s self-employed Income Tax helpline and training, support and development for foster carers, . In addition, if you’ve been approved as a foster carer with us, you automatically get membership to The Fostering Network, which provides free advice via its helpline on 0207 401 9582 or email.

We’re always happy to discuss any tax or National Insurance concerns you have. The best way to get more information is to fill out our enquiry form. If you ask for a call back, an advisor from your local National Fostering Group team will get in touch to explain more about how to become a foster carer, and answer any questions you have about foster care pay and Income Tax.

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