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Payments received for providing care in your own home are income for tax purposes but certain exemptions or expenses can be taken into account to ensure that you only pay tax on any profit you happen to make as a consequence. In the article we provide an overview of the current rules.
Do I have to pay tax on amounts I receive for providing foster care?
You are exempt from tax on any profits you make as a foster carer provided:
- You receive payment from a local authority or voluntary fostering organisation. (If you private foster care under a private arrangement you will be taxed on your profit in the normal way.)
- The amounts you receive in a tax year (or part tax year if the fostering began or ended part way through the year) do not exceed the current qualifying amount of £10,000 per household (irrespective of the number of registered foster carers living there) plus £200 per week for each child aged under 11 living there, or £250 per week for each child aged 11 or over.
What happens if my receipts exceed my qualifying amount?
If you receive payments in excess of your qualifying amount then you have a choice as to how your taxable amount is calculated. You can either;
- Pay tax on your actual fostering receipts less your actual expenses and capital allowances, (the 'profit method'),or
- Pay tax on your actual receipts from foster care less your qualifying amount (the 'simplified method'). In this case no account is taken of your actual expenses or capital allowances.
Do I need to keep a record of my expenses?
If you expect your payments to exceed the qualifying amount and you wish to pay tax on your actual profit then yes you do. It may be worth doing this anyway as it may not be clear until the end of the tax year which method would be advantageous for you. On the other hand if you do not want to be bothered with keeping a record of expenses there is no need, although this does mean that only the simplified method is available to you.
How do I tell HM Revenue & Customs (HMRC) which method I want to use?
You need to tell HMRC within one year of the filing date for your tax return. So for example your tax return for 2010/2011 needs to be filed by 31 Janaury 2012, so you have until 31 Janaury 2013 to tell them which basis you wish to adopt. In practice you would need to make this decision before you complete your return and filing this by the usual filing deadline will be accepted as the notification.
How should I show this on my tax return?
Whichever method of computing your profit you choose to adopt, you should complete the supplementary Self-employment pages showing your 'business' as 'foster carer' and putting an 'X' in box 4 to show that special arrangements apply.
If you wish to use the simplified method then you can use the Self-employment (short) pages and enter your total receipts in box 8, your qualifying amount in box 19 and your net profit in boxes 27 and 30. If you do not wish to use the simplified method then you need to use the Self-employment (full) pages and enter all your receipt and expenses in the appropriate boxes as indicated on the form.
What happens if I make a loss?
If you are using the simplified method and your total receipts are less than your qualifying amount then this is not a loss for tax purposes. In the unlikely event that a loss arises using the profit method then this can be carried forward to be set against future profits from foster caring.
Do I pay National Insurance on my profit from fostering?
The same rules apply to foster carers as to any other self employed person so if aged over 16 and under state Pension age you should register to pay Class 2 National Insurance Contributions (NIC) (currently £2.50 per week). Class 4 NIC will also be due on your profits if these exceed £5,715 (for 2010/2011).
Do the same rules apply to Adult Placement Carers?
As well as a simplified method, based on the 'Rent a room' allowance of £4,250 and the profit method, the alternatives for adult placement carers have historically included the fixed expenses method and the sampling method. In addition, from 6 April 2010 known as the 'qualifying care relief' for 'shared lives carers' has been introduced which operates on similar lines to that available to foster carers.
From 6 April 2011 this will replace the current simplified method, which will then be the only alternative to the profit method, but for tax year 2010/2011 only, both the old and new schemes are available. Determining which is most advantageous for 2010/2011 is therefore a little more complicated than previously and you may wish to seek professional advice.
If you would like further information on this topic then please contact any Wilkins Kennedy office.