BACK TO BLOGFoster carers are busy people – we’re sure you’ll agree!
Whether you’re currently a foster carer, or you’re considering entering into foster care, understanding how tax, National Insurance (NI) and financial benefits work is very important.
To help you better understand how tax and NI work in foster care, we sat down with the FosterTalk Tax Benefits & National Insurance team. They gave us lots of great details, tips and tricks to help you save money and ensure you’re getting all the benefits you’re entitled to as a foster carer.
Here’s what you need to know:
Everything foster carers need to know about their tax
One thing that is important to note: foster carers are self-employed for the purposes of self-assessment. This means that you’ll have to manually fill out a tax return .
The tax year runs from the 6th April – 5th April. Anyone who has had a self-employed income in the tax year must do two things by January 31st after the tax year end:
- File their self-assessment tax return
- Pay any tax that comes out of the self assessment calculation
You only need to pay tax on your ‘taxable profit’. A tax return is about all your sources of taxable income, including your job, any pension and your state pension. As a self-employed carer, you declare your ‘profit’ from your ‘business’ as a fosterer.
Every foster carer has a fixed tax exemption, or allowance, under qualifying care relief, PLUS an additional amount.
Starting in the 2024 tax year, allowances are:
- The fixed amount of the household allowance is £18,140 per annum pro rata
- The additional amount of tax relief is £375 per week for each child under 11 years old, and £450 per week for each child aged 11 or over
Your taxable profit from fostering is any amount of income exceeding the allowances.
If you do not exceed this allowance, and therefore have no taxable profit, you will not need to pay tax
Therapeutic carers are allowed additional tax relief to cover costs incurred from looking after specialist children. If you are a specialist foster carer and you are paying tax, please call us on 0121 758 5013 as you may be overpaying tax, particularly if your professional advisor has never asked you about the special needs of the children you are looking after. At the moment, we can go back to the 2021 year and resubmit to get any money back that you’re owed.
IMPORTANT NOTE: EVERYONE IN THE UK IS ENTITLED TO EARN £12,570 TAX FREE – DO NOT DEDUCT THIS AMOUNT FROM YOUR FOSTERING INCOME WHEN CALCULATING YOUR FOSTERING PROFITS, IT WILL BE AUTOMATICALLY DEDUCTED BY HMRC.
The self assessment system is always working a year behind, meaning that anyone that was self employed in 2023/2024 will pay their tax bill in January 2025, 2024/2025 pays in 2026, and so on.
How to fill out a tax return as a foster carer
As soon as you’re approved to become a foster carer by the panel, you should register for self assessment. The deadline to register is the 5th of October every year. It’s important that you get registered as soon as possible, even if you’re not yet fostering.
You can either go online using the link above, or request a CWF1 form to submit for self assessment.
In due course, you’ll receive a letter from HMRC. They’ll tell you when to do a tax return and they’ll give you a unique tax reference (UTR) number (this is very important, so make sure you’ve got your UTR noted down somewhere safe!).
Your costs are calculated by the government – this is explained in the HS236 reference sheet (Qualifying Care Relief for Carers Self-Assessment Helpsheet).
Your tax return is used to inform the government of all your taxable income in a tax year (even income as a PAYE, as this will be used to calculate your total taxable income – don’t worry, you won’t be taxed twice).
Once you’re registered, you can fill out a self-assessment form on your Government Gateway account, or get someone to prepare the return for you. You’ll be provided instructions on how to log in in your letter from HMRC.
For every year that you work as a foster carer, you will need to submit a tax return. If you are unsure about anything, we’re here to help. FosterTalk members can call us on 0121 758 5013 to speak to our specialist tax department. We’re here to offer free advice on how best to manage your tax. We also offer a fixed fee service for completion of your tax returns.
Everything foster carers need to know about National Insurance (NI)
Ensuring that your NI is up to date is vital if you want to receive your state pension in retirement.
There are 4 classes of National Insurance:
Class 1 – Paid if you are an employee (deducted from your pay on your payslip.)
Class 2 – Paid by the self-employed and collected via the self–assessment system.
Class 3 – Voluntary contributions paid to make up gaps in your contribution record – these are more expensive than Class 2 contributions (2020/21 Class 2 per week £3.05. Class 3 per week £15.30 per week.)
Class 4 – Paid by self-employed people with high profits (over £9,500 in 2020/21)
As foster carers, the NI you pay is Class 2, which you pay if your profits are over the small profits thresholds.
Everyone, including foster carers, need 35 tax years where you’ve either paid NI or have received credits to get the full state pension.
There are special ways you can get NI credits:
- If you receive carer’s allowance
- If you are in receipt of income support or Universal Credit
- If you are the foster parent of a child under 12 years of age
If any of the above are true for you, then your NI will remain up to date.
However, if you are not ticking any of the above boxes, you may not have kept your NI record up to date as there are special rules around fostering.
The rules depend on the level of profit from your business of fostering. If your profit is between £0 – the small profits threshold a year, then HMRC will not ask you to pay NI, and you need to fill out a CF411A form – you’ll need to ask for a letter from your supervising social worker that confirms you were a foster carer for the year.
HMRC will then credit your record for NI contributions for that year. If you fail to do this, you’ll have gaps in your NI record and may not receive your full state pension.
There is an important deadline that all foster carers need to be aware of – the 5th April 2025. Until this date, if you have gaps in your NI record, you can go back to the 2006/7 tax years to fill in gaps.
To check, we highly recommend clicking here to see what your state pension entitlement is. If you have gaps, again, don’t hesitate to get in touch with the FosterTalk team on 0121 758 5013.
What financial benefits do foster carers get?
Becoming a foster carer can fundamentally change your status from a benefits perspective.
Foster carers may be in receipt of working tax credits or income support (these are legacy benefits that are being phased out).
New foster carers will be offered Universal Credit – this is available to people of working age between 18-66.
Universal Credit is a means tested benefit, meaning that fostered children are not counted as part of your household. Allowances and fees gained from fostering are also not counted as income when calculating total income.
Universal Credit (UC) is available on a household basis, meaning that a household (not an individual) will qualify for Universal Credit if they have savings of less than £6,000. Entitlement to universal credit reduces as savings rise to £16,000. If your household savings are £16,000 or more you are not entitled to Universal Credit or other means of tested benefits.
UC is designed to help you pay your bills. As mentioned, your fostering income is disregarded when calculating your UC eligibility, meaning that many foster carers who spend the money they earn are entitled to UC and should be considering claiming working tax credits.
Note: 57% of any non-fostering income will be taken into account when assessing household income.
We highly recommend that foster carers, both new carers and experienced carers, get in touch with our team by calling 0121 758 5013 and asking for the benefits helpline.
Even if you’ve been fostering for years, there may be additional benefits available to you that you’re not currently claiming. Many carers are misadvised or have been refused benefits, even when they are eligible.
Finally, you may also be entitled to council tax relief. This is done on a local authority basis, so, again, it’s important that you check.
Tax, NI and financial benefits – advice for foster cares
There are so many financial elements that foster carers need to juggle – it’s our job at FosterTalk to take some of the stress away, allowing you to focus on spending quality time with your foster child.
FosterTalk members have unlimited access to our free tax, NI and benefits helpline. Our tax advisors are here to support you and make the self-assessment process as seamless as possible.
To enquire about membership, click here. It’s worth checking with your local authority or fostering agency to see if FosterTalk membership is included – they may cover your membership.
