Care and support

Tax

Foster Care Relief

Since April 2003 the tax system for foster carers is called Foster Care Relief. Under this system you are exempt from tax up to a set limit.

You need to tell Her Majesties Revenue and Customs (HMRC) what payments you are likely to receive and find out what tax, if any, you are required to pay.

Who does it apply to?

People who are paid to provide foster care to children or young people, placed with them by the local authorities or an independent fostering provider.

It does not include private fostering arrangements, or adult placement schemes. However, there is a HMRC relief scheme for adult placements too, accessed through the HMRC website (www.hmrc.gov.uk/individuals/adult-placement-carers.htm)

How does the relief work?

HMRC will treat you as being self-employed for the ‘work’ you do as a foster carer.

There are two parts to the relief:

• exemption - if your total income from foster care is less than the figure that HMRC allows and
• an optional simplified method of calculating profits if your income from foster care is more than this figure.

What is the exemption?

If your total income from fostering does not exceed the qualifying amount in a tax year, your fostering income will be exempt (free) from income tax for that year. This means that, for tax purposes, you will be treated as having no profit or loss from foster care for that year.

Exemption only covers income from foster caring. Income from other employment or investment income will be taxed in the normal way.

What if I am not exempt?

If your total income from fostering is more than the qualifying amount, you can choose between paying tax on either:

• the actual profit from foster care, worked out using total income, with separate tax relief for allowable expenses or capital allowances, or
• total receipts less the qualifying amount (the simplified method), without any separate tax relief for allowable expenses or capital allowances.

It is usually better to use actual profits if your allowable expenses and allowances are more than the qualifying amount. This is because your taxable profit will be less than if you use the simplified method.

What are my total receipts from foster care?

Your total receipts from foster care are all of the payments (fees, salaries, reward payments, allowances etc) you receive from your local authority or independent fostering provider, including payments that have previously been treated as non-taxable.

What is the qualifying amount?

Your qualifying amount consists of

• a fixed amount for each household - £10,000. If two or more carers in the same household receive foster care receipts separately, they share the £10,000 equally. If you are a foster carer for less than a full year you claim a proportion of this, plus
• an amount per week, for each foster child placed with you:
• £200 a week for a child aged under 11, and
• £250 a week for a child aged 11 or older.

Example: Ms Smith provides foster care to Joe, an eleven year old, for the whole of the year and to Lizzie, who is eight, for just ten weeks. No other foster carers live in her house.

Ms Smith's qualifying amount will be made up as follows:

Fixed amount £10,000
Joe (52 x £250) £13,000
Lizzie (10 x £200) £ 2,000
TOTAL £25,000

The qualifying amount is simply a way of seeing whether you have made a profit from providing foster care. It does not affect your personal allowance for tax. If you are exempt, the full amount of your personal allowance (which for 2008/9 is £5,435) is available to use against other income.

What records will I need to keep?

You will need to keep records for six years.

You need to keep a record of:

• your total income for the year from your local authority or fostering agency, and
• the number of weeks that you care for each child placed with you in the year. (A week runs from Monday to Sunday. Count any part of a week as a full week.) and
• the age (or birthday) of each child.

If you are not exempt and you intend to calculate your actual profit from foster care, rather than using the simplified method, you will need to keep sufficient records to support your figures.

Example: Ross and Sally provide foster care for one fourteen year old for the whole of the year and for one eight year old for ten weeks of the year. Their qualifying amount will be made up as follows:

Fixed amount - £10,000
Child 1 (52 x £250) - £13,000
Child 2 (10 x £200) - £ 2,000
Total £25,000

If Ross and Sally’s total income from foster care is less than the £25,000 figure, they are exempt from income tax on whatever fostering income they receive.

If their total income from foster care is more than £25,000, they can choose to calculate their tax by either calculating the profit (income minus actual expenses) or by using the simplified method (income minus £25,000).

Ross and Sally can’t ‘transfer’ any unused allowances from the foster care scheme to their other income but they can use their personal allowances to offset any tax due if their fostering income is above the £25,000 figure.

In parent and baby schemes, only the parent is in foster care, but the local authority pays an amount which is intended to cover accommodation and care for both parent and baby. HMRC treat both parent and baby as being in foster care and you can claim a weekly amount for both parent and baby when calculating your qualifying amount.

If you are a specialist caring for disabled children, you may incur additional expenditure on the children in your care, different from normal maintenance costs. For example, you may need to buy special equipment for a disabled child. You can add expenditure of this kind to the qualifying amount.
National Insurance Contributions

If you have a taxable profit, this is treated as your earnings from self-employment for national insurance contributions purposes.

Class 2 Contributions

All self-employed people aged 16 and over, but below 60 (women) or 65 (men) must register to pay Class 2 national insurance contributions. These are £2.30 a week for
2008-9.

Class 2 contributions count towards incapacity benefit, state pension and bereavement benefits.

Small earnings exception

If foster caring is your only source of self-employed income and you have no taxable profits you can apply for the small earnings exception. (If you are exempt, under Foster Care Relief, you have no taxable profit.)

You can also apply if your earnings from self-employment are low (less than £4,825 a year for 2008-9).

If you get small earnings exception you can choose whether or not to pay Class 2 contributions.

Class 4 Contributions

If your taxable profits are above a certain level you will have to pay Class 4 contributions. For 2008-9 the rates are:

8% - on profits of £5435 - £40,040
1% - on profits over £40,040

If you are exempt you will not have to pay Class 4 contributions.

Home responsibilities protection

Foster carers who are not making national insurance contributions need to protect their retirement pension through ‘home responsibilities protection’. You can get a form (CF411) from www.hmrc.gov.uk/nic/caring.htm or any HMRC office.