Foster Carer Tax Exemption Scheme

The following is presented based on the information currently available but please note that the situation may be subject to change. No responsibility for loss occasioned to any person acting or refraining from action as a result of any information in this material can be accepted by the originator.

Outline of the scheme.

Where gross foster care receipts for a financial year are below a certain threshold there will be no tax to pay on any of that money.

Click here to jump to the online calculator.

What are gross foster care receipts?

• boarding out allowance
• maintenance allowance
• clothing allowance
• personal allowance
• fee
• reward element
• skills payment
• task level payment
• additional needs payments
• special needs payments
• reimbursed expenses
• travel and other expenses
• any other type of payment made by a local authority or agency for foster care all added together

What will the threshold be?

There is a flat rate household element plus an amount per child.

The current rates are                

• Flat rate £10,000 per year (pro rata if not fostering for the whole of a tax year).
• Rate for a child aged under 11 years - £200 per week.
• Rate for a child aged 11 years or over - £250 per week.

• Will depend on the number of children in place, their age and length of stay
• Will not be the same for everyone
• May change from one year to the next even if the flat rate and rates per child do not change.

To calculate the threshold

You will need to know the age and length of stay of each child looked after between 6th April one year and 5th of April the following year.

First work out the number of weeks each child spent in your care:

Using a calendar count up the number of weeks between the start date of a placement and the end date.  Remember - government week runs from Monday to Sunday and part weeks count as whole weeks.  So if a child is in your care on any day between a Monday and the following Sunday count it as a week, even at the start and end of a placement.

Next work out the total allowance for each child

For each child in place during the year multiply the length of stay in weeks by either

• £200 if a child is under 11 years old
• £250 if a child is 11 years old or over. 

(Don’t forget if a child has their 11th birthday in the year the rate for them will be £200 for part of the year and £250 for the rest of the year).

Add up all the total allowances calculated above.

Add the flat rate allowance of £10,000 (or amount of this pro rata).

(The accompanying table illustrates the kind of levels the thresholds could be currently).

What if the total foster care receipts are more than your threshold?

You will have the following choice:

1. To accept that the amount of foster care receipts above your threshold is taxable income from foster care.
2. To draw up accounts under normal business rules to arrive at a profit for the year which will be taxable income from foster care

If the taxable income from foster care is your only source of income you will only pay tax on it if it is more than your personal allowance for the year (for most people this means more than £5,225 for 2007/08 and £5435 for 2008/09).

If you have taxable income from other sources (e.g. employment, other self employment, pensions, certain state benefits, certain savings and investment income) you may pay tax on some, or all, of the taxable income from foster care.

Some carers have already been informed that they will not be required to complete a return on an annual basis.  Others who are still obliged to complete an annual return, but whose taxable income from foster care calculated on the tax threshold basis is nil for that year, may subsequently be informed that they will not be required to complete a return on an annual basis thereafter. 

However, anyone not required to submit an annual tax return must carry out a tax threshold calculation and income comparison each year and inform the revenue if their receipts exceed their threshold in any year.  It is therefore important that each year carers keep a record of the age of each child in place and the corresponding start and end date of placement.

Many carers will not know what their threshold amount is and whether their receipts are more than this or not until the end of the tax year so will not be able to make a decision on what to do for the best until then so we advise that wherever possible keep receipts and where this is not possible keep a note of all expenses.

We will try to keep you up to date on this subject via our newsletters.  It is also worth keeping an eye on the Fostering Network web site at www.thefostering.net.

Additional expenses incurred in caring for disabled/special needs children

If you are a specialist carer you may incur additional expenditure on the children in your care, different from normal maintenance costs. For example, you may need to buy special equipment for a disabled child. You can add expenditure of this kind to the threshold amount.

Parent and baby schemes

In parent and baby schemes, only the parent is in foster care, but the local authority pays an amount which is intended to cover accommodation and care for both parent and baby. We treat both parent and baby as being in foster care and you can claim a weekly amount for both parent and baby when calculating your qualifying amount.

Continuing in Education after GCSE

When a child in care continues with their education after GCSE’s (to study for A Levels or equivalent level of other qualification) they may remain in place with a foster carer until they have completed this level of their education.  Up to age 18 they will be classified as in foster care, after age 18 they may be classified as in ‘extended foster care’ until they have completed this level of study and for tax and benefits purposes the payments the carer receives will continue to form part of their gross receipts from foster care and the placement will count towards their threshold amount.

Leaving Care Act arrangements

The Leaving Care Act provides for continued support to allow children in care to move to independence. In practice, the arrangements vary. Some local authorities adopt supported lodging schemes, others adopt arrangements equivalent to adult placement care. Payments under the Leaving Care Act for children who have left foster care will fall outside foster care relief, but the simplified arrangements for adult placement care may apply.

Adult Carers / Adult Placement Scheme Taxable Income

Simplified taxation scheme introduced from April 2003.

Three categories recognized:

Respite Carers

  - those who provide care for no more than a total of 182 days throughout the tax year are regarded as having no taxable income from care for that year. 

E.g. Respite provided for one adult for 45 days and another for 126 days, total = 171 therefore less than the 182 day maximum.  Respite provided for one adult for 100 days and another for 120 days, total = 220 therefore more than the 182 day maximum.

(When respite care is provided for more than a total of 182 days in a tax year the  rules for full time carers apply).

Full Time Carers (1 to 3 adults)

– calculate a threshold based on £400 per week for the first or only adult in place and £250 per week for each additional adult in place.  

Where total receipts are less than this threshold there is no taxable income from this.
Where total receipts are more than the threshold there is taxable income from this (for possible consequences of this see page 1column 1, foster carers total receipts above threshold).

Where income is greater than the threshold carers can opt to record actual, allowable expenses over a short typical period of time and use this to calculate an acceptable level of average allowable expenditure* for the year, which with revenue agreement can then be set against income to arrive at a taxable net profit or produce full income and expenditure accounts with all expenses fully supported by receipts.

*(Once agreed with the revenue this level of expenditure will remain in place for tax purposes until amended by a repeat of the exercise leading to a new agreement)

Full Time Carers (More than 3 adults)

– must produce full income and expenditure accounts with all expenses fully supported by receipts

Residence Orders

Payments under residence orders are non-taxable where local authorities make them on a discretionary and gratuitous basis. However, payments made under contractual arrangements may be taxable. For example, where a local authority contracts to continue making payments to a foster carer in return for the carer agreeing to take on a new legal responsibility for the child, there will be a legal entitlement to receive the payments. We would generally regard such payments as taxable income. Such payments will fall outside foster care relief, but the simplified arrangements for adult placement care may apply.

Home Responsibilities Protection

If you do not need to pay National Insurance Contributions (NICs) (because your income from self employment is below the threshold at which such contributions become compulsory) then you can claim Home Responsibilities protection (HRP) for each complete tax year you are registered as a foster carer. HRP helps to protect the basic State Pension of people who do not work due to responsibilities at home. For more information see form CF411, available from the Inland Revenue National Insurance Contributions Office, Inland Revenue Enquiry Centres and local DWP offices.
You can obtain further information about Class 2 NICs from:

• The Newly Self-Employed Helpline on 0845 915 4515 if you have not previously registered.
• The Self-Employed Helpline on 0845 915 4655 if you are currently registered.

How will the relief affect my entitlement to Child Tax Credit (CTC)?

You can claim CTC for your own children, but not for your foster children (unless, very exceptionally, the Local Authority do not pay you for Accommodation/Maintenance).

How will the relief affect my entitlement to Working Tax Credit (WTC)?

You are entitled to claim WTC provided that you or your partner are in ’qualifying paid work’ for at least 16 hours a week if you have a child of your own, or 30 hours a week if you do not. Foster caring is ’qualifying paid work’ and it is recommended that foster carers claim their working hours to be at least 40 hours per week.

How is my fostering income taken into account for tax credits?

You must include your income from foster caring in your declaration of income. Your foster caring income for tax credit purposes is the same as your taxable profit from fostering. So if your total foster care receipts are less than your qualifying amount, your profit from foster caring for both tax and tax credit will be nil.
Note: Other income (yours or your partner’s) will be taken into account for Working Tax Credit and Child Tax Credit purposes.

Foster Carers

What can local authorities / foster care agencies do to help foster carers with the new tax exemption?

1. To enable carers to calculate their income tax exemption threshold. At the end of the financial year provide to each foster carer:
   1. A list of the children in place with them during the that year to include the following information:
      • Date of birth.
      • Date placement started.
      • Date placement ended (unless placement ongoing at end of financial year).
   2. A statement setting out the total of all payments made to them in respect of foster care during that financial year.
2. To enable carers to make an accurate comparison of total receipts to threshold. Ensure that the total receipts from foster care figures included in statement 1(b) above are correct by:
   1. Having in place a system to record any overpayments / underpayments made to carers and track the collection / payment of these.
   2. If overpayments of fees and / or allowances occur
      • Where repayment / collection has been made in the year do not include either payment or repayment in statement 1(b) above.
      • Where collection / repayment is outstanding at the year end do not include payment in statement 1(b) above.
   3. If underpayments of fees and / or allowances occur
      • Where payment is made before the year end include in statement 1(b) above.
      • Where payment is not made until after the year end include in statement 1(b) above.