Tax Credits: Foster carers
This section has been written to provide information about tax credits for foster carers and shared lives carers (including adult placement carers). This is a particularly important area in which we have seen examples of wrong advice by the tax credit helpline.
Working Tax Credit
To be able to get WTC the claimant needs to be in qualifying remunerative work. In a nutshell this requires them to be working or about to start paid work, to be of a certain age and to work for a certain number of hours a week. See our entitlement section for further information on qualifying remunerative work.
The work the claimant does as a qualifying carer will fall under this heading if they are paid under a contract of employment as an employee or they are paid for their care services as a self-employed carer and their caring activities are treated as self-employed qualifying remunerative work.
A new test for whether an activitiy counts as self-employment for tax credit purposes was introduced from April 2015 and may affect foster carers. The test means that for an activity to count as self-employment, it must be run on a commercial basis, be organised and regular and undertaken with the aim of realising a profit. In practice, HMRC assume that where the earnings from the activity equate to the national minimum wage rates, that activity will automatically pass the test and in other cases, where earnings are less, they may ask for additional information to check whether the activity counts as self-employment.
As things currently stand, the position for foster carers under the tax credits test for self-employment remains uncertain. HMRC's advice to LITRG states that where a foster carer makes a loss, their activities may not meet the conditions which apply to the self-employment test, in which case they will not necessarily be regarded being in qualifying remunerative work for tax credit purposes. Although the fact the foster carer has made a loss does not necessarily mean their self-employed activity fails the test, it may be difficult for a foster carer to provide evidence that their foster caring work is commercial and undertaken with a view to realising a profit due to the very nature of the work.
There have been occasions when HMRC have incorrectly denied WTC to carers. Advisers should insist that a claim is allowed to be completed even if the tax credit helpline initally state that there is no entitlement. If the claim is turned down, an appeal can be lodged.
You should bear in mind that in the case of a joint claim, the claimant and their spouse or partner may have other work apart from caring and this may also be 'qualifying remunerative work' for WTC purposes.
HMRC have some guidance about foster carers on the GOV.UK website.
There is some information about foster carers and tax credits in HMRC's technical manual.
We will provide more information if it becomes available.
Child Tax Credit
CTC can be claimed if the claimant (or their partner) are 'responsible' for one or more children or 'qualifying young persons'. For more information about CTC see our entitlement section.
The claimant will be treated as 'responsible' for their own children but not for a child or young person who has been placed with them by the local authority, and is ‘looked after’ by the local authority. Therefore they can claim CTC for their own children, but not for the foster children where funding for them is from public funds.
This also applies if they are a potential adopter but the local authority pays them for accommodation or looking after the child or both.
However, adopters and guardians of children or young persons who have parental responsibility for them (eg under a special guardianship order or a residence order) can claim to be 'responsible' for the child in their care and so can claim CTC for them.
Foster carers who foster children under entirely private foster arrangements where no public funds are involved may be able to claim CTC for the children they foster, providing they meet the normal qualifying rules for CTC.
Income from caring and tax credits
The amount of tax credits will be based on the level of household income. Qualifying care receipts paid by local authorities and similar agencies are only taken into account in working out tax credit income to the extent that they are taxable.
LITRG have written extensive information for carers to explain how their income from caring is taxed. There are two methods: the simplified method under which qualifying care receipts are reduced by prescribed amounts and tax charged on the balance, if any), and the standard method (under which taxable profits are worked out in the usual way). See Qualifying care relief on the LITRG website.
If the claimant uses the simplified method for working out their profits for income tax self-assessment, their income from caring for tax credits purposes will be the amount on which they pay income tax. If their care receipts are wholly covered by their tax-exempt amounts, then none of their income from caring is counted in assessing their tax credits entitlement.
Also, if they use the standard method, their caring income for tax credits will be the same as their taxable profits after deductions.
Last reviewed/updated 25 May 2020