RSUs – A tech employee’s guide to restricted stock units

Published in

RSU – key topics

1. What are RSUs?

2. How do RSUs work?

3. How are RSUs taxed?

4. How can I reduce tax on RSUs?

5. Do I pay Capital Gains Tax on RSUs?

6. How can I minimise capital gains tax?

7. What should I do with my RSUs?

8. How can we help?

1. What are RSUs?

Restricted stock units (RSUs) are a form of equity compensation for employees. It is a promise from your employer to give you shares in the company in the future. RSUs are a popular form of compensation at large technology companies, including Microsoft, Amazon, Intel and Google.

Over time, RSUs can become a significant part of your overall income and net worth. So, it’s critical to understand how they work, how they are taxed and have a strategy in place for managing them.

2. How do RSUs work?

RSUs are awarded to employees at key events. Many large technology companies, including Microsoft and Google, provide new employees with RSUs when joining the company. They may also be awarded annually or depending on company performance.

With RSUs, there are two key dates to bear in mind, the grant date, and the vest date. The grant date is when the RSU is awarded. The vest date is when the RSU becomes available and can be sold. Typically, RSUs vest in tranches, rather than all at once.

For example, assume that you start working at Microsoft in January 2021. When you join the company, you are provided with 100 restricted stock units, with a four year vesting period. Each year, 25% of the RSUs vested. For every year thereafter, you are awarded an additional 100 restricted stock units.

In this example, 25 shares will vest after one year, a further 25 after the second year and so on.

RSUs, RSUs – A tech employee’s guide to restricted stock units, Frazer James Financial Advisers

For each additional year that you work for the company, you are awarded an additional 100 restricted stock units. This creates a ‘vesting cliff’, which means that a single year contains multiple vesting periods.

RSUs, Frazer James Financial Advisers

3. How are RSUs taxed?

If you’re looking for an RSU tax calculator for the UK, I’m afraid that there isn’t one. There are just too many variables to create a ‘one-size-fits-all’ RSU tax calculator for UK employees. The exact tax treatment will depend on your individual financial circumstances, how your employer has set up the RSUs, and the vesting schedule.

In all cases, there is no tax to pay when RSUs are granted. You only pay tax on RSUs when they vest. The UK tax treatment for RSUs is similar to how your salary is taxed. When your RSUs vest, you will pay income tax and employee national insurance. You may also need to pay for employers national insurance. Employers have the discretion to either pay this themself or transfer the liability to you.

If you are liable for employers national insurance, then you will need to deduct this from the RSU vest value when working out your income tax. Confusingly, you don’t deduct the employer national insurance when working out your employee national insurance (reference).

The below example calculates the tax you will pay when your RSUs vest. It assumes that you earn a salary of £150,000, receive RSUs of £50,000 and are liable for paying employers national insurance.

It shows that after paying all taxes, you will be left with just £21,736 from RSUs worth £50,000.

RSUs, Frazer James Financial Advisers

In most circumstances, the tax will be paid before you receive the shares (i.e. you will receive the net amount after withholding taxes).

* Employee/employer NIC rates as of tax year 2022/23.

4. How can I reduce tax on RSUs?

One way to reduce how much tax you pay on RSUs is by making pension contributions. This is because paying into a pension reduces your ‘adjusted net income’, which in effect reduces your tax bill and potentially your overall tax rate.

For example, assume that you earn £100,000 and receive RSUs of £25,000. This gives you a total income of £125,000. Because the RSUs pushes your total income above £100,000, you will pay 60% income tax on the RSUs.

This is known as the 60% tax trap. For every £2 you earn above £100,000, your Personal Allowance is reduced by £1. This means that in addition to paying the normal 40% tax, you also pay an additional 20% tax on income that was previously tax-free, resulting in a total tax rate of 60%

You can avoid paying this 60% tax charge by making a pension contribution. If you pay £25,000 into a pension, for tax purposes you will have earned £75,000 and receive RSUs of £25,000. This gives you a total income of £100,000 and means that you will avoid paying the 60% tax charge.

The below table shows that by paying £25,000 into a pension, you will save £4,247 in taxes/NI.

RSUs, Frazer James Financial Advisers

5. Do I pay Capital Gains Tax on RSUs?

Once RSUs vest, you can sell the shares immediately. There will be no additional taxes to pay if you do this. However, if you decide to hold onto the shares, you may pay capital gains on RSUs.

If the value of the shares increases between when they vest and when you sell them, you will have made a capital gain. Depending on how big the gain is, you may need to pay capital gains tax.

Everyone has an annual capital gains tax allowance. For 2021/22, this is £12,300 per person. If the gain exceeds this, you will pay capital gains tax at 20% if you’re a higher rate taxpayer (10% for basic rate taxpayers).

Side note – under current legislation, capital gains receive very favourable tax treatment. The top rate for capital gains is 20%, compared to 45% for income (or 60% if you’re caught in the tax trap). The Chancellor is considering increasing the rate of capital gains tax, potentially aligning it with income tax.

6. How can I minimise capital gains tax?

There are two ways to minimise capital gains tax.

The first is to sell the shares immediately upon vesting. This ensures that there is no gain to tax. If you still want to hold the shares, you could buy them back in a stocks and shares ISA. This ensures that any future growth is tax-free (although you may still pay withholding taxes, particularly if the shares are held in a US company). If you hold the shares within a SIPP, any future growth is tax-free and no withholding tax will apply (assuming that your pension administrator has set it up correctly!).

The second way is to transfer some of your RSUs to your spouse. This is particularly useful if you have accrued large gains on the shares since vesting. There is no tax to pay when transferring shares to your spouse, thanks to the inter-spousal transfer exemption. Your spouse can then sell the shares, making use of their capital gains tax allowance.

In effect, you can sell double the amount of shares before capital gains tax becomes payable.

7. What should I do with my RSUs?

For most people, the best thing to do is to sell their RSUs immediately upon vesting. At a minimum, this ensures they don’t build up a future capital gains tax bill.

But more importantly, it reduces the risk if things go wrong. By owning shares in your company, you are effectively doubling down on your employer. Think about it this way, if you were paid a cash bonus, would you invest it in your company shares? If the answer is no, then you should probably sell your shares and invest elsewhere.

8. How can we help?

As independent financial advisers, we can advise you on the best way to manage your RSUs. Creating a strategy for managing your RSUs and minimising the tax liability forms part of our standard financial planning service. Learn more about:

What we do

Who we work with

Our fees

 

All the best,

RSUs, Frazer James Financial Advisers

James Mackay, Independent Financial Adviser in Bristol

.

.

Financial Advisor Bristol and Pension Advisor Clifton

Frazer James Financial Advisers is an Independent Financial Advisor based in Clifton, Bristol.

About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.

If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.

Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.

This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.

Remember that investments can go up and down in value, you may get back less than you put in.

Contact us

Are you looking to partner with an award-winning independent financial adviser? Make smarter decisions with your finances - book a call with an expert today.