Foster Carers overview (and Special Guardians, Residence orders)

Foster carers are treated by HMRC as being in business. This means that they generally need to register as ‘self-employed’ and to complete a tax return – at least for the first year in business (see http://taxaid.org.uk/situations/carer/foster-carers-and-some-others/registering-with-hmrc).

If you are looking after a child under a Residence order, or Special Guardianship order, payments you receive after 5 April 2010 are exempt from tax ( http://www.hmrc.gov.uk/budget2010/bn26.pdf).

For the rules applying before April 2010, please see HMRC Helpsheet 236 (Helpsheet 236 (2009-10)) – but use the Adult placement rules, not those for foster carers.

Foster carers can use special tax rules to work out taxable profit.  Most foster carers use these rules. As a result, many have little or no taxable income. You need to elect to use these rules.  You do this on your Self assessment tax return. 

If you use the special rules for income tax, then they will also apply when working out your income for tax credits. Foster carers are in eligible to claim working tax credit (subject to the usual rules).  Paid foster care is accepted as ‘remunerative work’, and carers are usually full-time (over 30 hours work per week). Foster carers are may also be able to claim child tax credits, but only for their own children, not for any child they are fostering.

Foster carers may choose to work out their taxable profit based on normal accounting rules for business, instead of the special rules, if they prefer. The basic rule tax rule for businesses is that your taxable profit is your total business income, minus expenses incurred wholly and exclusively for business purposes (see http://www.hmrc.gov.uk/manuals/bimmanual/BIM37000.htm).