The maths foundation paper still has some quite challenging topics and questions on it, and is not just for those needing extra support. It's a perfectly valid choice for those who don't want to go on to maths and science and are unlikely to get grade 6 and above.
It is also suitable for those who need extra support and are aiming at lower grades, yes; much of the work covers topics that were initially covered by year 6, but the grade 4 and 5 questions are not to be dismissed.
I am surprised that the school would make the decision by mid Year-8, though. It doesn't have to be made until several years later, when exam entries go in, although in practice, many school do make the decision by the start of Year 10, as the classes tend to focus on different topics and go at different paces. Some schools do some cross-over sets, though, where they are taught work up to grade 6 or 7 level, and then make the decision on which tier nearer the time. Some schools that do a lot of setting do have lower sets in Year 8 and 9 that they might expect will then go on to Foundation sets in GCSE, but it's by no means a done-deal in most cases.
I do know of some pupils who have really found their feet in those years and have worked up to doing the Higher paper - sometimes they just needed the extra maturity, sometimes they needed to see a reason for working in maths and konwing they needed a grade 6 for their next course was the motivation; sometimes they needed a bit of tutoring or to get better at basics like timestables, etc.