Being a foster carer affects your tax and National Insurance contributions. This is because foster carers are treated as self-employed for tax purposes.
It’s important for foster carers to understand what fostering means for their finances, and to feel confident about navigating the tax system.
All foster carers are treated as self-employed for tax purposes. This means that, for every year you are an approved foster carer, you will need to complete a self-assessment tax return.
You can work out how much tax you owe on your fostering income using a scheme called Qualifying Care Relief (QCR). The scheme calculates a tax-free amount for the fostering household which is deducted from their total fostering payments to work out whether there is any tax to pay. For many foster carers, their total fostering payments are below their tax threshold, so they do not have to pay any tax. If you do have to pay tax, it may be possible to offset this amount against your personal tax allowance. Otherwise, it will be taxed at 20 per cent for all basic rate taxpayers.
Watch this tax video, presented by our colleagues at Williams Giles Xeinadin, for an easy-to-follow explanation of Qualifying Care Relief, calculating your taxable profit, registering with HMRC and more.
There are two types of National Insurance contributions for self-employed people including foster carers: Class 2 and Class 4. All foster carers will need to register to pay Class 2 National Insurance, but the amount you must contribute depends on the amount of tax you pay and your individual circumstances.
If a foster carer has no taxable profit from their fostering, or if their profit is below the ‘small profits threshold’ (£6,725 for 2023/4) there is no requirement to pay Class 2 National Insurance contributions. But you can still choose to make these payments to maintain your National Insurance record (for example, to access benefits such as the state pension).
If a foster carer has a taxable profit from their fostering that is above the ‘small profit threshold’ (above £6,725 for 2023/4) they will need to pay Class 2 and Class 4 National Insurance contributions. Class 2 contributions are paid at a flat rate per week, and Class 4 contributions are paid at a percentage rate of profit, depending on the amount of profit made.
