1. How do RSU's work?
Restricted Stock Units (RSUs) can be complicated, so let's break down the key points:
RSUs are a form of employee compensation in addition to other compensation an employee might receive such as a salary or bonus.
RSUs are a way an employer can give employees shares in the company they work at. They’re a popular form of compensation for technology companies in the US, with the likes of Google, Facebook and IBM issuing them.
To access your RSU’s there are two key dates to remember, the grant date and the vest date.
The grant date is when your RSUs are awarded to you, this may be when you first join a company or annually.
The vest date is when you can access your shares and therefore sell them. Once granted, RSU’s typically vest over a period of a few months or years. This is known as a 'vesting schedule' and is to ensure the employee doesn’t receive all the shares in one go and then leave.
2. RSU examples
Lets look at a couple of vesting schedule examples:
Rachel works for a software company and started in April 2023.
As part of her compensation, she’s been awarded 10,000 RSUs at the start of her employment.
The vesting schedule is as follows:
- In 6 month’s time, 2,500 of Rachel’s RSUs will vest
- From there every quarter, 625 of her RSUs vest until October 2026 until all her RSU’s have vested
If Rachel stays at the software company until October 2026, below shows when her RSUs are to be granted and when they’ll be vesting:
Jake works for an engineering company and started in April 2023.
As part of his compensation, he’s been granted1,000 RSUs at the start of his employment and every year after, he will be granted a further tranche of 1,000 RSUs.
The vesting schedule is as follows:
- 250 of his RSUs from each tranche will vest in the following 4 subsequent years each year after they’ve been granted.
- As Jake receives additional RSUs every year he works at the company, he will have years that contain multiple vesting periods.
If Jake stays at the engineering company for 4 years, below shows when his RSUs are to be granted and when they’ll be vesting:
3. How are RSUs taxed in the UK?
There are three tax considerations when it comes to RSUs: Income Tax, National Insurance Contributions (NICs) and Capital Gains Tax.
Income Tax and National Insurance Contributions
RSUs are not immediately taxed as income when they are "granted" to an employee. Instead, the RSUs are taxed when they are "vested," meaning when you have access to the shares and therefore can sell them.
The value of the shares at vesting is treated in a similar way to a salary and is subject to income tax and employee NICs. You may have to pay the employer NICs however this is at the discretion of the company you work for.
Let's look at three examples of an employee on a £70,000 salary, £100,000 salary, and £150,000 salary.
In all three examples, we have assumed that the employer NICs are to be paid by the employee and have not taken mandatory employer pension contributions into account.
Sam on a £70,000 salary
Sam earns £70,000 per year and has £20,000 of RSUs due to be vested:
Alex on a £100,000 salary
Alex earns £100,000 per year and has £20,000 of RSUs due to be vested:
Lana on a £150,000 salary
Lana earns £150,000 per year and has £20,000 of RSUs due to be vested:
4. How to reduce your tax bill on RSUs?
One effective way of reducing the amount of tax you pay on RSUs is by making contributions to your pension. Pension contributions provide income tax relief, this tax relief is based on the highest rate of income tax you pay.
Let’s use the example of Alex who is on a £100,000 salary. Below shows the taxes if Alex doesn’t make a pension contribution vs the situation where he makes a £20,000 pension contribution:
A £20,000 pension contribution means Alex does not fall into the 60% tax trap. The 60% tax trap is where for every £2 you earn over £100,000, your personal allowance is reduced by £1. This means you are paying 40% tax on these earnings plus you are losing your personal allowance that was previously tax-free and thus paying an additional 20% tax on that income, resulting in a total tax rate of 60%.
5. Do you pay Capital Gains Tax on RSUs?
The capital gain used on RSUs to assess whether you need to pay capital gains tax is the difference between the value when they are vested and the value when they are sold.
If you sell the RSUs as soon as they’re vested, then you will not pay any capital gains tax. If you decide to hold onto the RSUs once they’re vested, then whether you pay any capital gains tax will depend upon how big the gain is when you sell them.
For the 2023/24 tax year, the capital gains allowance is £6,000 for individuals. For the 2024/25 tax year and any subsequent tax years, the capital gains allowance is to be £3,000.
If your gain exceeds your allowance or you have used your allowance elsewhere then you will pay capital gains tax at 20% for higher rate taxpayers and 10% for basic rate taxpayers.
6. Should I sell my RSUs?
Selling RSUs as soon as they vest is usually the best option for most people for two reasons:
1. You won't have to pay capital gains tax if you sell right away. The proceeds can then be reinvested in a structure that is more tax-efficient, such as a pension or an ISA.
2. By not selling your RSUs you are effectively holding all your eggs in one basket, if your employer's stock underperforms, your entire portfolio does. You can reduce this risk by selling the shares and reinvesting the proceeds in a variety of investments and shares.
7. Can you keep RSUs after leaving a company?
This depends on whether the RSUs are fully vested or they have only been granted but yet to vest. Let’s look at both situations.
Leaving with Vested RSUs
If the RSUs have already vested and converted into shares before you leave the company, you own those shares outright and your departure from the company has no effect on your ownership of them.
Leaving with Unvested RSUs
If you leave your job with unvested RSUs, you will most likely forfeit your right to those RSUs as company shares.
Keep in mind that your employer commits to release the RSUs only if you remain with them for a specific amount of time. It is only reasonable that you give up your claim to those shares if you don't stay around for your full vesting schedule.
It’s important to know your vesting schedule so you know how many of your RSUs will vest and when. You do not want to miss out on any shares you may have coming up by leaving your employer just before your RSUs vest.
8. What is the difference between a RSU and a Stock Option?
Stock options are another form of employee compensation. Stock options are provided by your employer, you have the choice to buy the stock at a particular price (usually at a discount) before a particular date. It is entirely up to you whether you decide to buy the shares. RSUs, however, provide you the actual shares after the vesting period is through.
9. How can we help?
If you want advice on what to do with your RSUs then click the link below to have a free consultation call.
This content provides is for educational purposes only and does not constitute personal advice. Should you need advice, please request it. Remember that investments can go up and down in value, you may get back less than you put in.