Do foster carers need to pay National Insurance contributions?

Foster carers may have to pay National Insurance contributions (NICs), but this depends mainly on their profits from fostering and their wider work circumstances. Fostering is generally treated as self-employed work for tax and National Insurance purposes. This means a foster carer may need to account for self-employed National Insurance even where Qualifying Care Relief means little or no Income Tax is due.

Self-employed foster carers may be liable for different types of National Insurance, depending on their level of profit:

• Class 2 National Insurance: this is linked to self-employed profits and can help build entitlement to certain contributory benefits, including the State Pension. It may be compulsory when profits reach the relevant HMRC threshold.
• Class 4 National Insurance: this is calculated as a percentage of self-employed profits within the relevant profit bands. It is generally only due once profits pass the applicable threshold.

These thresholds and rates can change, so the current HMRC rules should be checked for the relevant tax year. If profits are below the threshold for compulsory contributions, a foster carer may still be able to make voluntary contributions. This can be worth considering where maintaining a National Insurance record is important, although paying voluntarily is not automatically the right choice for everyone.

Qualifying Care Relief and National Insurance are related to the same fostering income but are not the same calculation. Qualifying Care Relief is a tax measure used when working out whether fostering receipts create a taxable profit for Income Tax purposes. National Insurance is assessed under its own rules. Therefore, having little or no Income Tax to pay does not, by itself, confirm that no National Insurance is payable.

The amount used in the National Insurance calculation is affected by the foster carer’s self-employed profit rather than simply the total amount paid by a fostering service. Keep a clear record of fostering payments, allowances and relevant business expenses, and retain the calculations used to establish the profit figure. Records should cover each tax year and should distinguish fostering income from income received from other work.

A foster carer who also has employment will usually have National Insurance dealt with separately through their employment and their fostering activity. Employee contributions do not necessarily remove the need to check self-employed contributions. The position can depend on the type and level of employment income, self-employed profits and the relevant National Insurance rules for that year.

National Insurance is also separate from the question of whether a foster carer must complete a Self Assessment tax return. A person may need to register as self-employed and report fostering activity even where Qualifying Care Relief reduces the taxable amount. Conversely, the fact that a tax return is required does not mean that every foster carer will owe National Insurance.

Before submitting a return, check:

• which fostering receipts and allowable costs belong in the calculation;
• whether Qualifying Care Relief has been applied correctly;
• whether the resulting self-employed profit falls above or below the relevant National Insurance thresholds;
• whether another job affects the overall position; and
• whether voluntary contributions would be useful if compulsory contributions are not due.

Because fostering arrangements and individual financial circumstances differ, a foster carer should use the latest HMRC guidance or obtain advice from a suitably qualified tax professional. Keep copies of payment statements, expense records and submitted returns so that the figures supporting both the tax and National Insurance position can be reviewed if needed.