FCA Corporate

Foster Carers– Taxing Stuff


2 December 2004

Williams Giles & Co Chartered Accountants who advise the UK's leading independent foster care agency, Foster Care Associates Ltd, comments on revised tax laws affecting the foster care sector. Partner, Andrew Shepherd advises:

Since the inception of professional foster caring in the 1980's and the development of private agencies, foster carers have been regarded as self employed. Since the nature of the job dictates that the service is run from home and is integral to everyday family living - assessment of costs involved has historically been a hit and miss affair.

Prior to 2003, tax arrangements could vary enormously, depending on who had arranged them. Some cases were fairly generous to the carers, while others required carers to produce evidence of all expenditure incurred. The problem being that, in some extreme cases, the difference could run into thousands of pounds of tax payable, or a great deal of work for already stressed carers.

With effect from April 6, 2003, the regime for foster carers was changed and individual taxable rewards - which had been previously negotiated - were abolished. A new scheme which applied to all foster carers was set up and operated as follows.

  • The total amount of money received from the agency is treated as income. It should be noted that this includes all reimbursed expenses, including holiday and clothing allowances as well as mileage.
  • From this an initial allowance of £10,000 per annum may be deducted.
  • There is a further allowance of £200 per week for a child below the age of eleven or £250 per week for a child above the age of eleven.
  • The balance remaining represents taxable income from fostering on which tax will be paid and class 4 national insurance - after the deduction of personal allowances (for the current Tax Year these amount to £4,745).

The scheme offers a number of advantages and it is only now that foster carers are beginning to realise the benefits that it affords. First, it is a simple system to operate, which reduces the costs of compliance to the carers concerned. This means that many carers no longer need to keep such detailed records of the costs incurred on children in their care, which used to single them out as 'foster children'.

It is generally seen as being a fair scheme for the vast majority of carers. For example, carers looking after one placement, or those who are not paid more than the cost allowances, will have no tax to pay. Many can actually be removed from the Self Assessment Tax system, while still being treated as Self Employed.

As such they benefit by being able to claim full Child and Working Tax Credits, and national insurance credits or payments towards their state pension. Those who do still have tax to pay, are those who genuinely receive an income from their work - however, they are only taxed on what is seen as a fair portion of their income.

The effect on individual carers does depend on the sort of scheme that they were on before, those whose Agencies or Local Authorities had negotiated particularly beneficial schemes obviously did loose out, but most carers are much better off under the new scheme.