What are Restricted Stock Units (RSUs)?

What are RSUs?

RSUs are a type of employee compensation issued by an employer in the form of company shares. Basically, it is a promise from your employer that you will receive shares in the company if you fulfil certain requirements e.g. meet performance goals or stay with the company for a certain amount of years.

RSUs are a popular employee perk at large technology companies and other established corporations. For instance, many of Google’s employees are on equity plans, in the form of Google Stock Units. This encourages staff loyalty and motivates employees to help grow the company.

How do RSUs work?

RSUs are issued to employees through a vesting plan and are usually awarded once the employee achieves predetermine performance goals or upon remaining employed with a company for a specific length of time. Most companies give employees RSUs when they first join. They may also be awarded based on individual or company performance.

They give employees stocks in a company but they are not worth anything until vesting is complete. As an example, a company might offer you a £50,000 annual salary with £15,000 worth of RSUs that vest over the next five years. The RSUs are given a fair market value when they vest e.g. the price they would sell for in an open market.

How are RSUs taxed?

You do not need to pay any tax on RSUs when they are allocated. However, RSUs are considered income once they are vested. This means they are subject to the usual income tax and national insurance. Once this has been dedicated, the employee receives the remaining shares and can then choose to keep them or sell them for the cash value.

How can I reduce tax on RSUs?

There are a few ways to reduce the amount that you pay on RSUs. One option is to pay it into your pension which reduces your adjusted net income for tax purposes. The lower your income, the less tax you have to pay.

For instance, if your RSUs takes your income over £100,000 then you will be stuck in what is called the 60% tax trap and will have to pay 60% income tax. However, you can pay some of this money into your pension and reduce your net income below £100,000 so that you only pay income tax at 40%. This could save you significant amounts of money in income tax and national insurance.

Do I pay Capital Gains Tax on RSUs?

You can sell your shares as soon as the RSUs vest. You will not need to pay any extra taxes if you sell immediately, but you may have to pay capital gains on RSUs if you decide to keep them once vested and sell them at a later date.

Basically, if the value of the shares increases during the period that they vest and you sell them, then you will have made what is called a capital gain. You may have to pay capital gain tax on this amount, depending on how much it is.

In the UK, everyone has a capital gains tax allowance of £12,300 (for the tax year 2020/21). If you earn more than this, then you will need to pay capital gains tax at 20%.

How can I minimise capital gains tax?

There are a few steps you can take to reduce the amount of capital gains tax you are expected to pay. Firstly, you can sell your shares as soon as you receive them so that you don’t pay any capital gains tax.

Another option is to transfer some of the shares to your spouse. The inter-spousal transfer exemption means that you don’t have to pay any tax when you transfer shares to your spouse. You will effectively combine your two allowances meaning your capital gains tax relief will be £24,600 instead of £12,300.

What should I do with my RSUs?

Most people choose to sell their RSUs as soon as they vest so that they can avoid paying capital gain tax. However, there are ways to reduce the amount of tax you pay if you decide to keep the shares and sell them at a later date.

Keep in mind that you risk losing money if the price of the shares drops suddenly or your company goes under. If you would not feel comfortable investing your own money in your company shares, then it’s probably a good idea to sell the shares and take the money as a cash bonus.

Get in touch with our experts if you would like independent financial advice on investing and maximising your wealth.


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