Getting the most out of your RSUs
What are they, and why are they valuable?
RSUs (Restricted Stock Unit) are a popular form of compensation used by US companies to reward and retain their employees, mainly in the Tech sector.
They are shares of stock that are Granted to you in recognition for your value (the reward bit). They 'vest' at some point in the future, but they tend to vest in stages (called tranches) over a period of time rather than all at once (the retention bit).
If the value of the company increases over time, the value of these shares also increases, thus encouraging rewarded employees to work in tandem with the goals of the company, as they have a vested personal interested.
How are they taxed in the UK?
On the date they are granted, there is no tax event. Nothing.
On the date they vest, the value of the vested amount is taxed as Earned Income. This should happen through your payroll - so you will see some entries in your payslip for the £ value of the entire grant, and a deduction for the units that were sold to pay the tax, also in £.
The rate of deduction may look quite high. This is because the employer is normally allowed to take the Employers National Insurance owed out of the value of the grant. (At the time of writing, the maximum is roughly 54%). You will then be left with the remainder of the shares. This number of shares will appear in your US broker statement. The value on your payslip less the tax paid is normally your acquisition price for that tranche of shares.
At this point, one of two things can happen to the newly acquired shares. You can sell them immediately, or sell them later.
When the shares are sold, any difference in the price achieved on sale versus the acquisition price is treated as a Capital Gain or Loss and taxed at Capital Gains tax rates.
If you sell them on the date of vesting, there are unlikely to be any Capital Gains, there may be some small capital losses that could be applied to current or future year gains.
If you keep them sell them after multiple vesting events, you have to account for the sales according to UK Capital Gains tax law. This is very different to US Capital Gains tax law - so this has to be done manually in order to get the figures right because the broker statements will not help you.
At the time of writing, Capital Gains tax rates on sales of shares are lower than the equivalent income tax rates at the same income levels.
Should I sell the shares immediately?
By keeping the shares, you are actively taking the view that they are going to go up in value. This is not a tax driven decision. This is an investment and risk decision. By keeping the shares you are increasing your risk if things go wrong because not only is your employment income dependant on the success of your employer - so is the value of your investments.
You are esssentially 'doubling down'. This strategy can either end very well (microsoft, facebook...) - or very badly (Enron?). After all, you work within the company so you should have a better idea than most whether you think you would like to double down on it.
Sometimes diversification is a good thing - but it is your choice and your decision to make. Sometimes with great risk comes great reward.
How can I keep more of the money? The tax bit....
This really depends on your circumstances.
I need to spend the money now.
In this case, you sell them now. If the RSUs take you over £100,000 you will pay income tax at a marginal rate of 60%, plus the employers National Insurance. If you already earn in excess of this and the RSUs take you over £150,000 you will pay 45% income tax plus the employers National Insurance. This may result in an unexpected tax bill as payroll may not cope with this adjustment as you move through income tax bands/lose personal allowances. It may be prudent to either work out your tax over the summer after the tax year-end, or keep some funds back to pay any unexpected tax bills in January.
If the shares are sold at a loss, this cannot be offset against your income tax liability. There is no way to change the amount of income tax owed in the current year if the shares are sold on vesting and the money is spent elsewhere.
I do not need to spend the money now. I think the shares will appreciate, how can I reduce my future tax bills?
I would like to spend the money before retirement.
Sell the shares on vesting and repurchase them in a tax free wrapper
Re-purchase the shares within an ISA (Individual Savings Account) wrapper. This will mean that any gains to that point where they are sold will be liable to Capital Gains tax, but any future appreciation will be tax-free. The down sides:
- This is only available for £20,000 worth of shares every year.
- If the shares drop in value whilst they are in a tax free wrapper the losses cannot be used to offset any gains that are realised outside the wrapper.
Sell and re-purchase some shares within a Self-Invested Personal Pension (SIPP) for potentially for extra tax advantages, but more restrictions around spending the money.
Keep the shares with the broker and only sell what you want to spend, when you want to spend it.
Keep track of all of the tranches as they vest in line with UK Capital Gains tax law so you can report any gains or losses correctly on your self-assessment. Sell tranches of the shares to realise the current year's capital gains allowance to get this free of any further tax. At the time of writing, everyone has an annual capital gains allowance of £12,300 and any gains on shares over this amount will be taxed at either 10% or 20% (please do check current legislation). This can work for those who wish to spend some of the funds in the near future, as it is only the gain that is subject to tax, not the entire proceeds of the sale.
I do not need to spend the money now and would like to increase my pension savings. Can I reduce my current tax bill using these shares?
Sell some shares and deposit the proceeds into a Self-Invested Personal Pension (SIPP).
- For every £800 that is deposited a top-up of £200 income tax relief is received directly into the SIPP.
- Further tax can be reclaimed through the Self-Assessment process to refund all Income taxes paid. (There is no refund for any National Insurance amounts paid).
- Once purchased into a SIPP, shares can grow, receive dividend income and capital gains outside of annual Income tax reporting in future as well.
- Tax is deferred to a time when you may be paying at a lower rate. (see second bullet point below).
- This strategy is subject to a few rules around Annual Allowances and Tapering that govern the amount of income tax relief you are allowed to receive, so it is important to understand these (or find someone who does) before you decide to go down this route.
- This money cannot be accessed until retirement, and it will be subject to income tax when drawn as an income at that point.
- If you transfer shares directly into a SIPP, they will not attract tax relief (SIPPChoice 2021).
The relief is subject to a few rules around Annual Allowances and Tapering that govern the amount of income tax relief you are allowed to receive, so it is important to understand these (or find someone who does) before you decide to go down this route. With dual qualified team members, Websters Financial Planning Ltd can deal with both the tax and the regulated financial advice simultaneously.