NIM74150 - Class 2 National Insurance contributions: special cases: foster parents

Sections 803 to 828 of the Income Tax (Trading and Other Income) (ITTOIA) Act 2005

Foster parents are generally regarded as self-employed earners for NICs purposes. They can be liable for both Class 2 and Class 4 NICs – the extent of their liability will depend upon the level of profits.

There are occasions when a foster carer is not regarded as self-employed. This applies when the caring activities do not amount to the carrying on of a trade (for example, when a carer provides occasional respite care). In such cases the taxable profits, if there are any, will be chargeable to income tax as miscellaneous income rather than trading income. This means the carer is not liable to pay Class 2 or Class 4 NICs on those profits.

Tax treatment – qualifying care relief

Most foster carers are regarded as being self-employed for tax purposes – however, their income or profits from such care will usually be exempt from income tax and NICs because of certain foster care reliefs.

Qualifying care relief applies to people who get income from providing foster care to children placed with them by either local authorities or independent fostering providers. The relief does not apply to private fostering arrangements.

Sections 803 to 828 of the Income Tax (Trading and Other Income) Act 2005

There are 2 elements to the relief:

  • an exemption if total receipts from foster care do not exceed the ‘qualifying amount’.  The exemption is automatic – it does not have to be claimed.
  • an optional simplified method of calculating profits if receipts from foster care do exceed the ‘qualifying amount’.

Profit made by an individual in a tax year from the provision of qualifying care is deemed to be nil for income tax and Class 4 NICs purposes if total receipts from qualifying care do not exceed an individual qualifying amount.

Individuals whose total receipts from qualifying care exceed their qualifying amount can choose between:

  • calculating their taxable profits in the normal way on total receipts less actual expenses and capital allowances (the profit method); or
  • treating as their taxable profit the amount by which their total receipts from foster care exceed their qualifying amount, without any separate relief for expenses or capital allowances (the simplified method).

Whichever method is used, the carer is chargeable to income tax only on their taxable profits (and Class 4 NICs, if the foster care amounts to a trade).

In the absence of the relief, profits from qualifying care provision would be chargeable to income tax as the profit of a trade or as miscellaneous income in the normal way.

Treatment for Class 2 NICs

From 6 April 2015, a foster carer’s liability for Class 2 NICs mirrored that for Class 4 NICs. Where the foster care amounted to a trade, liability for Class 2 NICs was measured against the carer’s profits following the deduction of qualifying care relief (under the simplified method) or expenses and capital allowances (under the profit method). If the remaining profits were less than the small profits threshold, the foster carer could pay Class 2 NICs voluntarily.

From 6 April 2022 to 5 April 2024

A Class 2 NICs liability only arises where the self-employed earner has relevant profits exceeding the Lower Profits Threshold (LPT). 

Where a self-employed earner does not have relevant profits or their relevant profits are below the SPT, Class 2 NICs can be paid voluntarily to protect entitlement to State Pension and certain benefits. 

Where the self-employed earner has relevant profits from the SPT to the LPT they will be treated as having actually paid Class 2 NICs.

From 6 April 2024 onwards

The LPT was removed which means that liability to pay Class 2 NICs no longer exists.  

From 6 April 2024 the Class 2 Lower Profits Threshold was removed which means that liability to pay Class 2 NICs no longer exists from tax year 2024 to 2025 onwards. A self-employed earner with profits equal to or above the SPT is treated as having actually paid Class 2 NICs. A self-employed earner with profits below the SPT can still choose to pay Class 2 voluntarily.