Restricted Stock Units or RSUs for short are a popular way for some of the big listed firms such as Amazon, Google and Microsoft to incentivise their employees.
Effectively they are a form of equity compensation. The employer promises to give you shares in their company at specific dates now and in the future. The shares are normally restricted in some way – for example, they may not have voting rights or they may be granted only when certain targets are met.
How are RSUs’ awarded and taxed?
RSUs are generally awarded at key milestones , for example when an employee joins or when there is good performance.
There are two distinct dates here – the grant date and the vest date. The grant date is when the RSU is awarded but the vest date is when the RSU becomes available and can be sold. Typically the RSUs vest in tranches over a number of years not all at once.
If for example, you started working at Google in January 2022 you were granted on that date 100 shares, with a 5 year vesting period. This would mean you would receive 20 shares on January 2023 (vest date) and 20 every January after that up till January 2027.
The next year in January 2023 you could be awarded another 100 shares , 20 of which would vest the year after increasing the total shares vesting to 40 in 2024 etc.
There are no taxes to pay when the RSUs are granted only when they vest. When the RSU’s vest though, the shares are classified as income and you will pay income tax and employee national insurance. The employer typically pays employers’ national insurance although they may transfer this liability to you.
The tax is usually paid before you receive the shares so you receive the net amount of shares.
Do I sell the shares? What are the tax consequences?
It may make sense to sell your shares as soon as they vest.
Typically holding one share is much more risky than holding a globally diversified portfolio of index funds for example. If something happens to your company you could lose your job and your money. You should ask yourself, if I had spare cash would I invest it all in my company? If I lost all this money, what difference would it make to my financial plans?
This decision however should be yours to make.
On the plus side, if you sell immediately there would probably be no capital gains tax to pay. If you have built up holdings in the past which have gains, you could transfer these to your spouse without paying any tax and make use of their allowance and possibly lower capital gains tax rates if you sell them.
As many shares have fallen this year, it may also make sense to crystallise some losses which can be used to reduce your capital gains tax bill going forward.
You can also transfer some of your shares into an ISA if you wish thereby ensuring that future capital gains and dividends arising from these shares are free of tax. Between you and your spouse you have a £40,000 ISA annual allowance.
Can I reduce my income tax bill?
There may be scope to make extra pension contributions or use up any previous unused annual allowances to get tax relief. A carry forward analysis can bring to light tax savings that could be lost if you don’t take advantage of them.
Depending on your risk appetite. also instruments such as Venture Capital Trusts could be appropriate in reducing current tax liabilities.
Should I get some help?
As independent financial planners specialising in working with high earning professionals , tax planning is a key part of our offering. We can help you navigate the RSU minefield, give you clear actionable recommendations and peace of mind as part of your very own bespoke financial plan.
Get in touch for an initial discovery meeting at our expense and without obligation.
Please note
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.
Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
