Taxation of foster carers

From the Fostering Network booklet on allowances & income tax for 2017/2018. This applies to previous tax years back to 2003-04.

Special tax arrangements apply to all foster carers who receive income from local authorities for providing foster care to children and young people up to 18 years old (21 if the young person is disabled). From April 2004, HMRC introduced a tax threshold for foster carers. If you receive less than the threshold – you will pay no tax on the money you receive from your local authority.

Tax threshold

There are two elements to the exemption or ‘qualifying amount’.

• Fixed amount - £10,000 per household a year
• Additional amount per fostered child: £200 per week for a child aged under 11 and £250 per week for a child aged 11 or over.

Income below this qualifying amount is tax free. If your total amount received from fostering exceeds the qualifying amount you can either pay tax on:

• Your total amount received less the qualifying amount or
• Your total amount received from foster care minus expenses. This means keeping records of precise expenditure throughout the tax year using receipts.

If you are exempt, these tax arrangements will not affect any other income you may have (for example income from employment or investment income), which will be taxed in the normal way.

Neither will the tax arrangements affect your personal allowance. If you are exempt, the full amount of your personal allowance (which for  2017/2018 will be £10,500 if you are under 65) is available to use against other income. You should always consult the HMRC website for more detailed information on taxation of your income.

Parent and baby schemes

 HMRC will treat both parent and baby as being in foster care and you will be able to claim a weekly amount for each of them when calculating your qualifying amount.

Disabled/special needs children

If you are a specialist carer and find that the qualifying amount does not cover your expenses you will be able to use the following method:

If you have specific items of expenditure which are clearly not of a type covered by normal maintenance (for example special equipment for a disabled child) HMRC will accept that actual expenditure consists of the qualifying amount plus the special items.

If your expenses are exceptional by degree rather than type (for example exceptional cleaning or wear and tear because of the nature of the child's special needs), then you will need to use the sampling method. This means you should keep records for a sample period, which should normally be a period of not less than one month and preferably three. Multiply your resulting total to arrive at a fair estimate of total recurring expenses for the year.

Leaving Care Act arrangements

If you continue to receive payments under the Children (Leaving Care) Act 2000 arrangements for children that have left foster care, the payments will fall outside foster care relief, but you may be able to use the simplified arrangements for adult placement care.

Where you continue to provide the same amount of care that was provided while the young person was in foster care and the payments are equivalent to foster care allowances, HMRC will apply the arrangements available to adult placement carers which are broadly equivalent.

The thresholds are as follows:

• £400 per week for the first resident in care at any one time and
• £250 per week for the second and third resident in care at any one time.

If you use this method, you will need to keep records of your total receipts from providing care, but will not need to record your expenditure.

National Insurance Contributions (NICs)

If you are exempt from tax – you will not have to pay NICs. However, the Fostering Network recommends that you should look at whether it is in your interest to pay NICs. The number of years that you pay NICs may affect benefits you receive in future, for example the state pension.

Record keeping

You will need to keep a record of

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

If you are not exempt and you intend to calculate your actual profit from foster care worked out using total income, with separate tax relief for allowable expenses or capital allowances, you will need to keep sufficient records to support your figures. You will need to keep these records for six years.

Further advice on tax issues

You can contact your local HMRC office by phone or via the internet - see HMRC website for details, or contact Tax Aid, a charity which offers free, independent and confidential advice to anyone with a tax question or problem tel: 0845 120 3779. You can visit the Low Incomes Tax Reform Group website: www.litrg.org.uk/help/lowincome/selfemployed/assessment.cfm#foster