Understanding Income Tax and National Insurance for Foster Carers

Foster carers are treated by HMRC as self-employed and, therefore, must register their self-employment with HMRC.

If you foster as a couple you need to decide whether to register as a couple or not. You also need to consider National Insurance when you register.Once you have registered as above HMRC will send you an activation code through the post. Use it as soon as you receive it as it expires after 28 days and you have to apply again. Online access is easy to follow and you will be asked to devise your own password just like online banking or bill paying.

State Pension

From April 2016, the number of years you are likely to need to pay in to receive a full state pension will be 35 years for men and women. You can get a pension statement from the Department of Work and Pensions to see if you need to pay class 2 or 3 contributions or claim national insurance credits or carers credit to fill in any gaps. See www.gov.uk/state-pension-statement

National Insurance

You automatically register to pay national insurance contributions by registering as self-employed. All self-employed people aged 16 years and over pay Class 2 national insurance contributions. Foster carers must register even if their actual earnings are less than their qualifying amount.

Small earning exception (SEE)– if you are not earning enough to pay tax you will be exempt from paying national insurance. However, you should call the Newly Self-Employed Helpline on 0300 200 3504 as if you are not registered you may be charged a penalty.

Class 4 national insurance payments are for those who earn more than £7,956*

Threshold

A fixed amount of £10,000 per household is used currently as the threshold for tax-free earnings plus an additional amount per child depending on their age

£200 per week for each child aged 0-10 and £250 for each child aged 11-17 years. So for example, if you care for a 5-year-old and a 12-year-old child you will have a threshold of £10,000 and £450 x52 per year before you are liable for income tax payments. You can calculate part of a week as a full week runs from Sunday to Monday.

Once you have calculated your threshold this is your qualifying amount.

For example, if you care for two separate children for 52 weeks

Threshold is £10,000 plus £23,400(allowance for children) = £33,400 per annum qualifying amount Actual income* is £18,200 for 5 year old (£350 x52 weeks) and £19,240 for 11 year old (£370 x 52 weeks) = £37,440 per annum Taxable income would be £37,7440 actual income minus threshold of £33,400 = £4,040

*Actual income includes all allowances, fees, rewards or special payments or expenses that you receive from your fostering service, including mileage payments.

If you put the figures in the HMRC online calculator, the calculator does the job for you and advises you of the amount you owe straight away!

You can call to talk to an adviser and they will help you complete? You can save the information and go back to alter the information if you have made a mistake. It is very user-friendly!

Qualifying For Care Relief Scheme

This is the scheme the HMRC use to simplify the way a tax threshold is calculated for carers. The threshold has not changed since 2003 which means more foster carers are becoming liable to pay tax. However, you are only liable for money earned above the threshold and after allowing for expenses against that amount.

Working Tax Credit (WTC)

WTC tops up the income of low-paid workers. Fostering counts as self-employment so you might be entitled if your profit from fostering for tax purposes is nil or very small. You can check your entitlement and claim tax credits by calling the Tax Credits Helpline on 0345 300 3900.