Do foster carers pay National Insurance on fostering income?

National Insurance is assessed separately from income tax. For foster carers, the relevant test is generally the level of self-employed profit shown after allowable deductions and applicable fostering reliefs, rather than the total fostering payments received. Where qualifying care relief covers the fostering income, there may be no compulsory National Insurance liability from fostering alone.

Which National Insurance contributions may apply?

• Class 2 National Insurance: the rules for self-employed people have changed, so Class 2 is not generally charged in the same way as it was previously. Depending on profit levels and circumstances, voluntary contributions may be relevant when considering entitlement to certain contributory benefits.
• Class 4 National Insurance: this can apply where self-employed profits exceed the relevant HMRC threshold. It is calculated through the self-employed section of the tax return rather than being deducted from each fostering payment.

The thresholds, rates and rules can change, so the position should be checked for the particular tax year concerned. A foster carer may therefore have no National Insurance to pay, may have a Class 4 liability, or may choose to consider voluntary contributions. The answer depends on the calculation of their self-employed profit and their wider circumstances.

How qualifying care relief affects the calculation

Foster carers can use qualifying care relief when working out the taxable result of their fostering activity. This relief is based on factors such as the number of children cared for and the periods for which they are placed. The relief is deducted under the special fostering rules before deciding whether the fostering activity has produced a taxable profit.

If the resulting figure is nil or below the relevant National Insurance threshold, fostering will not normally create compulsory contributions on that activity. If there is a profit above the applicable threshold, National Insurance may be due even though the amount received from the fostering service appears much higher than the amount treated as profit.

What foster carers need to report

Foster carers who are registered as self-employed normally report their fostering receipts, allowable expenses and qualifying care relief through Self Assessment. National Insurance is then worked out from the information in the return where the relevant conditions are met. A tax return can be required even when the final calculation shows no income tax or National Insurance to pay.

Keep records of fostering payments, dates of placements, allowable costs and any other income. These records help show how the profit has been calculated and make it easier to distinguish fostering activity from employment, pension income or another self-employed trade.

What if two people foster together?

Each foster carer’s National Insurance position is considered separately. Where both people receive or share fostering income, the allocation of income and expenses should be recorded consistently and reflected in each person’s tax return. One person’s employment income or other self-employed profit does not automatically create a National Insurance liability for the other person’s fostering activity.

National Insurance can affect entitlement to contributory benefits and the State Pension, so a decision not to pay voluntary contributions should be made with that wider position in mind. Foster carers should check their individual record and the current HMRC rules, particularly where fostering is their only source of self-employed income. An accountant or adviser familiar with foster care taxation can also confirm how the reliefs and current thresholds apply.