What exactly are restricted stock units, or RSUs?

Employees can receive equity compensation in the form of restricted stock units, or RSUs. It’s a promise to give you shares in the company, in the future, from your employer. At major technology firms like Microsoft, Amazon, Intel, and Google, RSUs are a common form of compensation.

RSUs have the potential to increase your overall income and net worth significantly over time. As a result, having a plan in place for managing them and knowing how they are taxed is essential.

How do RSUs function?

Employees often receive RSUs at important events. Numerous huge technology organizations, including Microsoft and Google, give new representatives RSUs while joining the organization. They might also be given out once a year or based on how well the company does.
The grant date and the vesting date of RSUs are two important dates to keep in mind. The RSU is given out on the date of the grant. The RSU becomes available for sale on the vest date. RSUs typically mature over time rather than all at once.
For instance, expect that you begin working at Microsoft in January 2023. You will receive 100 restricted stock units with a four-year vesting period when you join the company and 25% of the RSUs vest each year. 25 shares in this example will become exercisable after one year, 25 more after the second year, and so on.

How do RSUs get taxed?

Assuming you’re searching for a RSU charge number cruncher for the UK, there may not be one that is comprehensive enough for you to make an informed decision. To create a “one-size-fits-all” RSU tax calculator for UK employees, there are simply too many variables. Your individual financial situation, the manner in which your employer has set up the RSUs, and the vesting schedule will all play a role in determining the exact tax treatment.
When RSUs are granted, there is never any tax to pay. RSUs are tax-free until they become fully vested. The way RSUs are taxed in the UK is comparable to how your salary is taxed. You’ll have to pay income tax and employee national insurance when your RSUs go into effect. You may likewise have to pay for businesses public protection. Employers have the option of paying for this themselves or passing the cost on to you.
The amount of tax you will owe when your RSUs vest is calculated in the example below. It assumes that you are responsible for paying employers’ national insurance and receive RSUs in the amount of £50,000.

It shows that subsequent to making good on all expenses, you will be left with only £22,705 from RSUs worth £50,000.
RSU Personal Duty Estimation
By and large, the duty will be paid before you get the offers (for example you will get the net sum after tax).
* The rates for income tax and national insurance are as of the tax year 2023/24.

How might I decrease tax on RSUs?

Contributing to a pension is one way to lower your RSU tax bill. This is due to the fact that contributing to a pension reduces your “adjusted net income,” thereby lowering your tax bill and possibly your overall tax rate.
Let’s say you make £100,000 and get RSUs worth £25,000, for instance. This provides you with a complete pay of £125,000. You will be subject to income tax at a rate of 60% on the RSUs because they raise your total income above £100,000.
The 60% tax trap is the name for this. For each £2 you earn above £100,000, your personal allowance is decreased by £1. This implies that in addition to paying the standard tax rate of 40%, you must also pay an additional 20% tax on income that was previously exempt from tax, resulting in a total tax rate of 60%. Contributing to a pension can help you avoid paying this tax charge of 60%. For tax purposes, you will have earned £75,000 and received £25,000 in RSUs, if you contribute £25,000 to a pension. This means you won’t have to pay the 60% tax, as your total income will be £100,000.

Do I Have to Pay Capital Gains Tax on RSUs?

You can immediately sell shares when RSUs vest. If you do this, you won’t have to pay any more taxes. Nonetheless, in the event that you choose to hold the shares, you might pay capital gains tax on RSUs.
You will have incurred a capital gain if the shares increase in value between when they vest and when you sell them. You may be required to pay capital gains tax, depending on the magnitude of the gain.
Everybody has a yearly capital gains tax allowance. Up until 2022/23, the allowance was £12,300. However, it will be reduced to £3,000 per person in 2024/25 from £6,000 in 2023/24. If you are a higher rate taxpayer and your gain is greater than this, you will be subject to capital gains tax at a rate of 20% (10% for basic rate taxpayers).

The highest rate for capital gains is 20%, while the highest rate for income is 45% (or 60% if you fall into the tax trap). However, The Chancellor is thinking about raising the rate of capital gains tax and possibly making it the same as income tax.

How can I reduce my RSUs’ capital gains tax?

There are two strategies for reducing capital gains tax.
The first option is to immediately sell the shares when they vest. This guarantees that there will be no taxable gain. If you actually have any desire to hold the offers, you could repurchase them in a stocks and shares ISA. This guarantees that any future growth is tax-exempt.
Transferring some of your RSUs to your spouse is the second option. This is especially valuable on the off chance that you have gathered enormous gains on the shares since vesting. The inter-spousal transfer exemption means that there is no tax to pay when you transfer shares to your spouse. After that, your spouse can use their capital gains tax allowance to sell the shares.
In effect, this lets you sell twice as many shares before you have to pay capital gains tax.

How should I use my RSUs?

The best course of action for the majority of individuals is to sell their RSUs as soon as they vest. This essentially guarantees that they will not accrue a capital gains tax bill in the future.
Yet, more critically, it diminishes the risk in the event that things go badly. By possessing shares in your organization, you are centralising much of your employment and investment risk to just one organisation. Consider this: if you were given a cash bonus, would you put it into company stock? If the answer is no, you probably should sell your shares and put your money in another place to diversify.

How can we help you?

As independent financial advisers, we can give you FCA regulated advice on the most effective way to deal with your RSUs. Our financial planning service includes devising a plan to minimise your tax burden and manage your RSUs.

This information is based on our understanding of current legislation, including (but not limited to) FCA, PRA and HMRC regulation. It does not constitute any form of advice. First Sentinel Wealth Ltd will take no responsibility for any loss which may occur as a result of reliance on this information.