Qualifying care relief
Qualifying carers (both foster carers and shared lives carers) are normally treated as being self-employed, as explained earlier, but are able to use a simplified method of working out their taxable profits. If total receipts from qualifying care do not exceed the individual’s limit (referred to as the qualifying amount), the receipts will be tax-free.
You can find a basic guide to qualifying care relief (HS236) on GOV.UK. Here, we look at the relief in more detail.
It is important to remember that qualifying care relief is an optional alternative to working out your trading profit on ordinary self-assessment principles. If you are not entitled to qualifying care relief, you can simply declare the payments you receive for providing care minus expenses wholly and exclusively incurred in looking after the service user. The result will often be the same, i.e. no tax – it is just that you will have the administrative burden of completing and submitting a full tax return form.
This relief will apply to you if you provide foster care, ‘qualifying care’, for children or young people up to their 18th birthday and you receive income for doing so.
Foster carers need to be providing services, qualifying care, to a local authority (HSS Trust in Northern Ireland) or to an independent fostering provider or voluntary organisation. The relief does not apply to income received from private fostering arrangements nor where the payments are made to a parent or someone who had parental responsibility for the child before they were taken into care.
You can read more about the definition of qualifying care for foster carers on the dedicated page.
Please note that most payments to adopters who have taken on parental responsibility for the children they adopt are free of income tax anyway, so qualifying care relief is not in point. Similarly, payments to people who have taken on parental responsibility for a child or children under a residence order, or a special guardianship order, are also free of income tax.
Shared lives carers
The relief also applies to those caring for individuals providing qualifying care under ‘shared lives care’ arrangements, which include adult placement carers, staying put carers and certain kinship carers.
The definition of qualifying care was changed from 6 April 2017. You can read the definition of qualifying care for shared lives purposes on our dedicated page.
Where an individual receives shared lives care receipts for more than three people at the same time, qualifying care relief does not apply and the individual will be liable to normal taxation rules for traders, including completing a full tax return and keeping full records of all income and expenses (this cap does not apply to foster care). For the purpose of determining whether the three person limit has been exceeded, brothers and sisters, including half-brothers and sisters are treated as one person. If you care for two adults and two children (under the age of 18), then the cap does not apply to you because you do not have more than three adults in your care.
Other arrangements may be covered, such as supported lodging schemes and parent and child arrangements set up by some Local Authorities. Your Local Authority or social care scheme can tell you if your arrangements are eligible for qualifying care relief.
We are working with HMRC in an attempt to have some guidance and forms changed and clarified. We would be very pleased to hear from you if you are experiencing any difficulties with the operation of qualifying care relief. Real life examples always help us when presenting our case for change.
What do I need to know before I can work out my relief?
What are total qualifying care receipts?
These include all income from a Local Authority, independent fostering provider or voluntary organisation or social care scheme for qualifying care. You can read the definition of qualifying care for foster carers and shared lives carers on the relevant pages.
What is an income period?
If you are a self-employed carer we generally say that your income period is the 12 months up to the date when you make up your accounts. So if you make up your accounts to 31 December each year, the period from 1 January to 31 December is your income period and the date to which you make up the accounts, i.e. 31 December, is your accounting date.
HMRC also call this your basis period and the profits you will be taxed on for any tax year will be those to the accounting date ending in that particular year. So if your accounting date is 31 December, your accounts for the year ending 31 December 2018 will be the basis for the profits you are taxed on for 2018/19.
While for tax purposes the date you make up your accounts to is your choice, many carers do work on an April to March year which, as well as being the actual tax year, is also the year end used by most local authorities. You may therefore find it simpler to use 31 March or 5 April as your year end.
You can find more information on accounting periods and accounting dates by looking at ‘How do I work out my taxable profits?’ in the self-employment section.
If you just receive casual one-off receipts from caring, your year end will be 5 April each year and so your income period will run from 6 April to 5 April.
The schemes that pay you should provide you with statements, possibly electronic, showing the payments made to you and you should retain these in case HMRC ask for evidence.
What is a qualifying amount?
This is the amount which you can receive for your caring activities free of tax. It is made up of two amounts:
- A fixed amount for each household of £10,000 a year; and
- An amount per child or person per week, allocated to the relevant carer.
If there are two or more carers in the house receiving their caring income separately, the (£10,000) limit is divided equally between them. If you are a carer for less than a full year then you will get a proportion of the fixed amount (£10,000) based on the number of days you were a carer in that year. There are no regional changes to this amount depending on where you live in the country, nor is there any addition if you look after disabled children or adults.
The amount per week is:
£200 a week for a child under age 11; and
£250 a week for an adult or young person age 11 or over including the week in which the child reaches their 11th birthday. If the placement is only for part of a week, the amount is allocated in full for that week. A week runs from Monday to Sunday for these purposes and the full weekly allowance is available for any part-week when you have a person in your care. For example, if a person arrives on a Thursday, the full weekly allowance is appropriate for that week.
Carrie Green is a self-employed foster carer. She makes her accounts up to 5 April each year so her accounting date is 5 April. Carrie looks after two foster children: Amy, who is 8 and Emma, who is 13. Both children were already in her care on 6 April 2018.
Carrie's 'qualifying amount' for the tax year 2018/19 is calculated as follows (to do this we use the age of the children in her care in the year 6 April 2018 - 5 April 2019):
Fixed amount = £10,000
Amount per child
Amy – 52 weeks x £200 = £10,400
Emma – 52 weeks x £250 = £13,000
Total qualifying amount = £33,400
If you decide to use qualifying care relief, the relief is in two parts depending on whether or not your income is more or less than the qualifying amount.
You will receive an automatic exemption if total qualifying care receipts for an income period are less than the qualifying amount. This means that you do not need to work out your profits and expenses in the normal way as your profit is taken to be nil.
The exemption is mandatory if it applies to you – in other words you cannot choose to work out you profit or loss in any other way. You do still need to fill in a tax return and claim qualifying care relief on the ‘Self-employment (short)’ pages. HMRC will treat you as not making a profit or loss for the year, so you do not pay tax or Class 4 National Insurance on your caring income. Provided that your qualifying care receipts are less than the qualifying amount, you should put an ‘X’ in box 4 of these pages, and a ‘0’ (zero) in box 31. No further entries will then be required for your qualifying care receipts.
If your qualifying care receipts are exempt you cannot claim expenses or capital allowances. Normally there cannot be a tax loss in a year when your qualifying care receipts are exempt either. If you have any overlap relief (for example, from changing your accounting date) this will not be lost, however you may need to ask a professional adviser to help you work out when and how to use it.
If your total care receipts for your income period are more than the qualifying amount, there is a simplified way of working out your profits which you can use instead of the standard method. The standard method means that you need to enter on your tax return form details of all income and expenses.
Looking again at Carrie Green from Example 1, her total qualifying amount for 2018/19 was £33,400. If her total foster care receipts were £30,000 for her income period to 5 April 2019, Carrie would be exempt as her qualifying amount of £33,400 is more than her income.
Alternatively, if Carrie's total foster care receipts were £36,000, she could use the simplified method explained below to work out her profits.
Working it out
As we mentioned above if your total qualifying care gross receipts for your income period (that is your qualifying care receipts ignoring any expenses or capital allowances) are more than the qualifying amount, there is a simplified way of working out your profits that you can use as an alternative to the standard method.
What this means for you is that your profit will be the difference between your total qualifying care receipts and your qualifying amount.
Following on from Example 2 above, Carrie's taxable profit under the simplified method will be the difference between her income of £36,000 and her qualifying amount of £33,400 – giving a taxable profit of £2,600.
If you use this method, you should fill in a tax return. You should claim qualifying care relief, and include your total receipts and your qualifying amount, on the ‘Self-employment (short)’ pages.
What if I decide I do not want to use the simplified method?
The standard (income) method
Remember you can only do this if your total qualifying receipts exceed your qualifying amount. If your total receipts are less than your qualifying amount then automatically your profits are taken to be nil.
If your receipts exceed the qualifying amount then you can either use the simplified method (see above) or use this method. Your profits will then be worked out based on your total income receipts from caring less allowable expenses and capital allowances. This is the standard method of working out your profits, in other words as for a normal self-employed ‘business’.
If you use this method, you should fill in a tax return and HMRC advise you to include the ‘Self-employment (full)’ pages. In fact, there is nothing to stop you competing the ‘Self-employment (short)’ pages, but HMRC might ask you further questions if you do that.
You may want to use this method if your expenses and any available capital allowances exceed your individual limit.
Is there a time limit by which I must decide whether to use the simplified way or not?
You must elect to use the simplified method. In practice you would probably make this decision before you complete your tax return and the way the form is completed will make the intention clear. Filing your tax return by the usual filing deadline will be accepted by HMRC as the relevant notification and a separate notification is not needed in these circumstances.
Your election has effect only for the tax year for which it is made. The deadline for making the election is the first anniversary of the self assessment return filing date (31 January) for the year for which the election is made or a later date if HMRC will permit.
If Carrie in Example 3 decided to use the simplified method for working out her 2018/19 profits she will have until 31 January 2021 (anniversary of the filing date of 31 January 2020 for 2018/19 self-assessment tax returns) or such later date as HMRC decide in which to make the election.
Capital allowances are allowances that you get on plant and machinery you acquire for your business. For more information on capital allowances, see Helpsheet 252 Capital allowances and balancing charges.
As mentioned above, if you are entitled to the exemption or are using the simplified method to work out your profits you will not be able to claim capital allowances.
Where qualifying carers choose to work out their profits in the standard way, they may claim capital allowances.
There are special rules that apply if you do not work out your profits from caring using the same method each year because you may be able to claim capital allowances in one year but not in the next and so on.
For further information, go to the HMRC manual on GOV.UK.
We cover losses in general under our self-employed section for low income workers.
As stated above, you cannot normally have a loss in any year that your qualifying care receipts are equal to or less than your individual limit for the year. Any losses from earlier years, when you were not exempt, are not lost – they are dealt with as follows:
- losses can be set against your profits from your qualifying care in the usual way if your total receipts from qualifying care exceed your qualifying amount. This applies whether you have worked out your profit by using the standard method or by using the simplified method;
- losses brought forward will continue to be carried forward to set against the profits from qualifying care of a later year, if your total receipts from qualifying care in a year following the year of loss do not exceed your qualifying amount and you therefore have no tax to pay on that income.
Any other income you have, for example from employment or savings will be unaffected if you are claiming qualifying care relief and will be taxed in the usual way.
If your qualifying care receipts are exempt, the full amount of your personal allowance (£11,850 in 2018/19) is available to use against any other income you might have.
If they are not exempt, you can set your personal allowance against any taxable care profits whether or not you choose the simplified or standard method.
Looking at Example 3 above if Carrie has no other taxable income then her profits of £2,600 would be covered by her personal allowance and she would have no tax liability for the year.
You will need to keep records to help you decide which method of taxing your profits is best for you. Bear in mind that you are legally obliged to keep full records if you decide to use the standard method of working out your profits and expenses.
Even if you are exempt or want to use the simplified method, it is still advisable to keep all your records to support deductible expenses and capital allowances in case you decide instead to compute your profits or losses using the standard method.
Basically you should keep a record of:
- total qualifying care income receipts for your income period;
- a note of the number of weeks that you care for each placement with you in the income period and, if children, the age (or birthday) of each;
- your care-related expenses in case you need to decide which method of working out your profits to use.
You can find more on record keeping on our page 'How do I pay tax on self-employed income?'.
You can find out more general information about the different types of National Insurance contributions (NIC) for the self-employed in our 'self-employment section'.
Qualifying care relief and Class 2 NIC
HMRC treat any profit you make from qualifying care, whichever method you choose to work it out, as your self-employed earnings for working out whether you need to pay any Class 2 NIC (£2.95 a week in 2018/19).
What if my profits are very low – will I still need to pay Class 2 NIC?
If you are exempt (so that your taxable profit is treated as nil) or if your taxable profit is below £6,205 for 2018/19 (this is the small profits threshold) you need not pay any Class 2 NIC for that year. If your profits are below the small profits threshold you can choose to pay Class 2 NIC voluntarily.
If you choose not to pay Class 2 NIC you need to bear in mind that Class 2 contributions provide access to contributions-based employment and support allowance, maternity benefit, state retirement pension and bereavement benefit and that your entitlement to these benefits may be affected. You might however, be eligible to claim credits for Class 3 NIC while you are caring, which preserves your state pension entitlement – the GOV.UK website has a section on this.
Qualifying care relief and Class 4 NIC
In any year that you are exempt, HMRC will treat you as not making a profit or loss for the year, so you do not pay Class 4 National Insurance on your caring income.
If you calculate your profits on either the simplified or the standard method, Class 4 NIC will be payable on whatever your taxable profit is for that tax year.
Ellie White is using the simplified method to work out her profits for the current tax year 2018/19 and she makes a profit of £12,660.
Her Class 4 NIC is worked out like this:
£12,660 minus lower limit £8,424 = £4,236 profit chargeable to Class 4 NIC
Class 4 NIC due = £4,236 @ 9% - £381.24
The liability of £381.24 will be due for payment together with the tax on the profit of £12,660 on 31 January 2020 (the filing date for the 2018/19 tax return)
Forthcoming changes to Class 2 NIC
The Government have decided not to proceed with their plans to abolish Class 2 National Insurance (NIC) – you can find confirmation of this on GOV.UK.
Where can I find more information
You can find detailed information about the operation of qualifying care relief in HMRC’s manual on GOV.UK.