Foster carers and the tax system

Foster care arrangements never sit easily with the social security system. For example, the Inland Revenue and Customs and Excise treat foster care as self-employment and say foster carers are entitled to claim working tax credit as “workers” even if they have no other employment or income other than a fostering allowance. And relatively generous tax rules mean that the income from fostering is usually ignored when the credit is worked out, so foster carers can qualify for quite hefty payments.

Yet, at the same time, the same foster carer can be told by the Department for Work and Pensions that fostering isn’t work – so the confused and baffled foster carer is told to claim income support because they are not working.

There is usually further confusion when the looked-after child turns 18. It is common now for young people to remain with
their former foster carers as commercial “lodgers”. The confusion comes about because some local authorities continue to pay what they may call a “fostering allowance” to these carers. But in reality, these are after-care payments, not fostering allowances – and this is not just a question of semantics.

Bona fide fostering allowances are subject to specific tax and benefit concessions. But the same amount of money, paid to the same carer to provide accommodation for the same young person, can be taxable once the young person turns 18. There are special arrangements in place for adult placements and there is also what Revenue and Customs call the rent-a-room scheme. But the key issue for many foster carers is that they need to be told that the previous tax relief scheme they enjoyed does not apply to post-18 placements.

If the carer is receiving benefits – such as income support, pension credit, housing and council tax benefit or tax credits – the income they get from having a “lodger” could have a different impact on those benefits than when it was a  fully-disregarded fostering allowance.

A recent Social Security Commissioner decision (although not specifically concerned with a post-foster care arrangement) has changed the way in which all board and lodging payments should be treated by the benefits system. Before the ruling, the calculation was relatively simple: the first £20 of the payment was ignored as well as half the balance of the board and lodging charge received. So, if the carer received £120 from their lodger, £20 plus half of £100 was ignored, leaving £50 to be counted as income if the carer claimed means-tested benefits.

The new ruling makes this calculation more complex, but potentially more generous. Under the new rules, the DWP must deduct £20 from the gross earnings plus 50% of the remainder. They then have to deduct all expenses, including the tax liability, to arrive at a net earnings figure. The final step is to deduct a further £20 plus 50% of the remainder.

So, if a carer rents out four rooms in their house and as a result receives almost £51,000 a year, this income – for income
support purposes – would be rated as nil under the new system!

A remarkable result, but it doesn’t disguise the fact that, for tax and benefit purposes, post-foster care is not the same
as foster care. At 18, young people and their carers need accurate advice about what their post-foster care situation is.

Gary Vaux is head of money advice, Hertfordshire Council. He is unable to answer queries by post or telephone. If you have a question e-mail graham.hopkins@rbi.co.uk

This article appeared in the 20 September issue under the headline “Mixed messages leave foster carers baffled on tax status”