What are Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are a widely used form of employee compensation, representing a promise from your employer to grant you company shares in the future. This type of equity compensation is prevalent, especially in large companies.
Given their potential impact on your overall income and net worth, it’s crucial to grasp how RSUs operate, their tax implications, and to develop a strategy for managing them effectively.
How RSUs Operate?
RSUs are typically granted to employees during key events, such as joining a company or based on performance. They differ from Company Share Schemes but share similarities. Two essential dates to remember are the grant date (when RSUs are awarded) and the vest date (when they become available for sale). Usually, RSUs vest in stages rather than all at once.
Tax Implications of RSUs
The tax treatment depends on individual financial circumstances, employer’s RSU setup, and vesting schedule. Notably, there’s no tax upon grant; tax is due only when RSUs vest. Taxation aligns with the process for salaried income, involving income tax and employee national insurance. Employers may cover employers national insurance or pass the responsibility to you.
Mitigating RSU Tax Liability
To reduce tax on RSUs, consider making pension contributions. This action lowers your ‘adjusted net income,’ potentially reducing your tax bill and overall tax rate. For instance, if RSUs push your income above £100,000, resulting in a 60% tax rate, pension contributions can help counteract this effect.
Capital Gains and RSUs
Upon vesting, you can choose to sell the shares immediately, incurring no additional taxes. However, if you hold onto them, you might face capital gains tax if the shares appreciate before you sell them. Everyone has an annual capital gains tax allowance, which decreased to £6,000 from 2023/24 onwards. Capital gains tax rates range from 10% to 20%, based on your tax bracket.
Minimizing Capital Gains Tax on RSUs
Two strategies can help minimize capital gains tax:
- Sell the shares upon vesting to avoid taxable gains.
- Consider holding them in a stocks and shares ISA or within a Self-Invested Personal Pension (SIPP) for potential tax benefits and reduced withholding taxes.
Remember, tax laws may change, so staying updated is crucial for making informed decisions about your RSUs.