Registering as self-employed with HMRC
His Majesty’s Revenue and Customs (HMRC) treats all foster carers as self-employed for tax purposes. So, once they have been approved, all foster carers should register as self-employed. HMRC will charge a penalty if a foster carer does not register as self-employed within six months of the end of the tax year in which they are approved (i.e. the year they start self-employment). The tax year runs from 6 April to 5 April, so the deadline for registering as self-employed is 5 October. (For example, if you became approved as a foster carer between 6 April 2023 and 5 April 2024, you would need to register by 5 October 2024.)
It's simplest to register with HMRC online. You can also call HMRC if you need support with your registration.
Once registered as self-employed, foster carers will need to calculate how much tax they owe and submit a self-assessment tax return every year. To do this, it’s important that foster carers have a record of the children they foster, the dates they are with them, and their ages.
Foster carers who register as self-employed are automatically registered for Class 2 National Insurance contributions.
Paying tax on a fostering income
There is a special tax scheme for foster carers called Qualifying Care Relief (QCR). This scheme covers foster care, shared lives care, Staying Put care, parent-and-child care, supported lodgings and kinship care. It allows foster carers to receive payments from their fostering service up to a certain level (called their ‘tax threshold’), without having to pay tax. Qualifying Care Relief means that many foster carers have little or no tax to pay on their fostering income.
However, foster carers need to do a simple calculation at the end of each tax year to find out what their tax threshold is and compare it with their total fostering payments for the same tax year. If their total payments are below their tax threshold, they do not have to pay tax on their fostering income.
It’s important to remember that each foster carer’s tax calculation will be unique to them and their personal circumstances. We would advise foster carers not to compare themselves with others, as their tax thresholds are unlikely to be the same.
Step 1: Calculating the tax threshold using Qualifying Care Relief
For foster carers, the first step in working out their tax bill is to calculate their tax threshold. This is the amount of money that foster carers can be paid by their fostering service without having to pay tax (also known as Qualifying Care Relief).
The calculation is done by adding up two figures. Please note, we have used figures from the tax year 2023 – 24 in this illustration, and figures for previous and future tax years will be different.
1. A ‘basic element’ of £18,140 per household per tax year on the basis the foster carer has been approved for the whole of the tax year. (This is pro rata for foster carers newly approved part-way through the tax year.)
2. A ‘child element’ per child for each week (or part week) that a child is with you, as follows:
- £375 per week per child aged under 11
- £450 per week per child aged 11+ (including any young people with a Staying Put arrangement)
It’s therefore very important for foster carers to keep accurate records of the children they foster, the dates they are with them and their ages.
It’s also important to know that a ‘tax’ week runs from Monday to Sunday, so if a child arrives on a Thursday and leaves the following Tuesday, their stay would be counted as two ‘tax weeks’.
A worked example
A foster carer looks after a child aged 8 for a full tax year (6 April to 5 April). Their tax threshold calculation would be:
1. The basic element of £18,140, because the foster carer has been approved for a full year, plus
2. The child element of £375 per week (as the child is under 11), for a total of 52 weeks (a full year).
This gives the tax threshold of £18,140 (the basic element) + £19,500 (the child element of £375 x 52 weeks) = £37,640.
The foster carer’s tax threshold is £37,640. This means they can earn up to £37,640 before having to pay any tax.
Step 2: Calculating the total payment from the fostering service
The next step is for foster carers to work out the total payment they have received from their fostering service for the tax year (6 April to 5 April). This is everything paid to the foster carer by their fostering service, including fostering allowances for the child(ren), fees or reward payments, retainer payments, holiday or birthday allowances, mileage and any other expenses. Fostering services should give their foster carers a statement after the end of the tax year (5 April), showing the total payments for the year.
Step 3: Comparing the figures to find the tax to pay
The final step is for foster carers to compare their tax threshold with the total payments they have received from their fostering service. If their total fostering payments are lower than their tax threshold, there is no tax to pay on the fostering income (i.e., there is no ‘profit’ from fostering).
If their total fostering payments are higher than their tax threshold, this is called a ‘tax liability’ (i.e., there is tax to pay on the ‘profit’ from fostering). Foster carers in this situation then have a choice to make. They must decide whether to continue using QCR and accept their calculated tax threshold or use the traditional ‘profit and loss’ method to calculate their exact expenses from fostering, minus their income, to work out how much tax they owe. Read more about the ‘profit and loss’ method including the calculations involved.
We have developed a film to help you understand how to calculate your tax threshold using Qualifying Care Relief. (The figures in the film are accurate to 5 April 2023.) Watch the film.
A note on exceptional expenses
Qualifying Care Relief is a simplified method of working out any tax owed by foster carers and is used instead of the ‘profit and loss’ method of itemising every single expense incurred through fostering. However, QCR does allow foster carers to increase their fostering tax threshold if they receive any ‘exceptional expenses’. For example, a foster carer might have bought a £300 piece of sensory equipment for a disabled child they are caring for which was then reimbursed by their fostering service. The foster carer can add this ‘exceptional expense’ of £300 to their fostering tax threshold. They must keep the receipt of the purchase as proof of the exceptional expense. HMRC does provide guidance as to what is or is not an exceptional expense, but the general principle is that it must not be a ‘regular’ cost incurred in the care of a child. Foster carers who receive exceptional expenses are usually considered by HMRC as 'specialist foster carers'. If a foster carer is unsure whether an expense is exceptional, they can contact HMRC.
Calculating the tax owed using the ‘profit and loss’ method
The traditional ‘profit and loss’ method is a way of calculating tax using exact figures. To use this method, foster carers need to keep detailed records of everything they spend on fostering throughout the tax year and keep any receipts as evidence. Foster carers also need to be able to show what proportion of their expenditure (food shopping, bills and so on) was on fostering, which can be tricky to work out. They would then then subtract (minus) their income to work out the tax they owe. This is a more complex and time-consuming method than using Qualifying Care Relief, so it is only usually worth doing if a foster carer has very high expenses connected with their fostering.
Using the personal tax allowance
Even if a foster carer has a tax liability from their fostering income, they may not need to pay any tax if they have not used their personal tax allowance (for example, if they foster full-time and have no other employment). Every UK resident has a personal tax allowance which may vary with their circumstances. This is the amount of income you can receive each year, including any taxable profit from fostering, without having to pay tax on it. Find out what the current personal tax allowance is.
A note on other arrangements and tax
If you care for a child under a private fostering arrangement (that is, 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, the 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.
If you have a Special Guardianship Order, any special guardianship allowance you receive is exempt from tax. These payments are not treated as income from self-employment, and you don’t need to declare them on a self-assessment tax return.
Sending in the tax return
Once a foster carer has calculated the tax they owe, they will need to send in a self-assessment tax return, covering the period from 6 April in the previous year to 5 April in the current year. The deadline for submitting the tax return is midnight on 31 October (for paper forms) or 31 January (for online forms).
If you complete a paper copy of a self-assessment tax return form you will need to complete two forms: the SA100 and the self-employment supplementary page (short version or long version, for foster carers who receive £85,000 or more in total payments from their fostering service). The GOV.UK website offers further guidance for completing the tax return forms.
National Insurance contributions (NICs)
Foster carers pay National Insurance contributions (NICs) to qualify for certain welfare benefits and the State Pension. There are two types of National Insurance for people who are self-employed, depending on their profits: Class 2 and Class 4. Foster carers who register as self-employed are automatically registered for Class 2 NICs. Foster carers will only pay Class 4 NICs if they make a significant profit on their fostering income.
Foster carers have a few options in terms of paying these contributions. The best option will depend on their individual circumstances, including whether they have a full National Insurance record. Foster carers can check their National Insurance record on the GOV.UK website.
Small Profit Threshold (SPT) and Lower Profits Limit
- If a foster carer has taxable profit from their fostering below the Small Profit Threshold - including if they have no taxable profit from their fostering - they will not have to pay Class 2 NICs or Class 4 NICs.
In this case, foster carers can:
- - Do nothing. (If a foster carer chooses not to pay Class 2 NICs, their entitlement to contribution-based welfare benefits may be affected.)
- - Pay Class 2 NICs voluntarily to maintain their National Insurance record and access to contribution-based welfare benefits. (There is an option on the tax return form to pay the contributions voluntarily.)
- - Apply for National Insurance credits for each week they are approved as a foster carer. This must be done at the end of each tax year and will require a supporting letter from the fostering service. (National Insurance credits only count towards the State Pension.)
- If a foster carer has taxable profit from their fostering above the Small Profit Threshold and below the Lower Profits Limit they will be treated as having made Class 2 National Insurance contributions without needing to pay anything. This means they will continue to receive access to contributory benefits including the State Pension.
- If a foster carer has taxable profit from their fostering above the Lower Profits Limit, they will be required to pay Class 4 NICs. This will be charged at a percentage on profit between the Lower Profits Limit and the Upper Profits Limit, and a percentage on profit above the Upper Profits Limit.
- They will be treated as having made Class 2 National Insurance contributions without needing to pay anything. This means they will continue to receive access to contributory benefits including the State Pension.
Foster carers will stop paying Class 2 National Insurance when they reach State Pension age and will stop paying Class 4 National Insurance from the start of the tax year (6 April) after they reach State Pension age.
More information about National Insurance
For more information about National Insurance:
- Visit the GOV.UK website for support, including telephone contact details.
- Read HMRC’s ‘HS236’ help sheet on Qualifying Care Relief.
- Visit HMRC’s online customer forums.
Other helpful organisations
- TaxAid is a UK charity that provides free tax advice to people who are on low incomes.
- The Low Incomes Tax Reform Group (LITRG) aims to give voice to those usually unrepresented in the tax system, including offering free tax advice to those on low incomes.