Tax Implications and Treatment of Restricted Stock Units (RSUs)

RSUs, or Restricted Stock Units, have gained widespread popularity as a form of employee incentive in recent years. These employee share option schemes are particularly prevalent in multinational tech corporations, though they can also be found in banks and smaller enterprises, sometimes labelled under different terms.

A large number of our clients are based in the UK and they work for American listed companies from the UK. RSUs are part of their overall remuneration package. Dealing with RSU taxes can get complicated especially because there are no online tools due to the number of variables involved. Some platforms such as Morgan Stanley will help their US based customers with these complex calculations (WASH SALES). However, for UK based clients, the automatic calculations are not relevant and the UK rules and the tax calculations must be done manually. This often involves ignoring the calculations(gains/losses) done by brokers on their statements.

What is an RSU?

An RSU essentially represents a type of share that comes with specific restrictions. For instance, it might lack voting rights upon grant or be contingent upon meeting certain predefined targets before the shares can be vested.

RSUs are granted to employees during significant milestones. Major tech giants such as Microsoft and Google commonly offer RSUs to new hires as part of their compensation package. These units may also be allocated annually or contingent on the company’s performance. It’s important to note that RSUs share similarities with, yet remain distinct from, Company Share Schemes ESPP.

When dealing with RSUs, two critical dates come into play: the grant date and the vest date. The grant date marks the bestowal of the RSUs, while the vest date signifies when these units can be accessed and traded. Typically, RSUs mature in portions, rather than all at once, ensuring a gradual process of vesting.

In the context of UK taxation for individuals who are tax residents in the UK, RSUs can trigger tax liabilities on various occasions. Navigating the intricacies of reporting these taxes, particularly when they are not managed by the employer, can be a complex endeavour.

This complexity can be further compounded if the individual received RSUs while working for the same company abroad, either prior to or after becoming a UK tax resident

Do I need to declare “sell to cover” RSU shares?

The simple answer is “yes”. Although these shares were automatically sold on your behalf by your broker, in the eyes of the taxman, you have “sold” shares. Therefore, you will treat them similar to how other shares are treated when you sell them from your broker’s account. You may be eligible for an exemption if the value of shares sold is less than four times the amount of annual exemption. As the annual exemption allowance is being reduced every year, most people who receive RSUs are now required to do additional reporting even if no tax is payable.

There is a common misconception that sell to cover shares do not need to be declared and we have seen many cases where these were left out of the tax reports. It is important to note that sell to cover shares are not likely to trigger a taxable gain because they are sold immediately and usually, the tax-free annual exemption is enough to cover any tax charges.

The UK government is reducing the tax-free annual exemption. Therefore, it is becoming important to keep track of sell to cover transactions as the allowances get reduced. In some cases, we have seen that sell to cover transactions alone were able to trigger tax charges even though no other shares were sold. This usually happens when the share price changes significantly in a short period of time.

Are Capital Gains Taxes Applicable to RSUs?

Once your RSUs vest, you have the option to promptly sell the shares without incurring additional taxes. However, if you choose to retain ownership of the shares, you might become subject to capital gains tax on RSUs.

If the value of the shares appreciates between their vesting date and the sale date, a capital gain is realized. Depending on the magnitude of this gain, you could be liable to pay capital gains tax.

Every individual has an annual capital gains tax allowance. Until the 2022/23 tax year, this allowance stood at £12,300. However, it has been reduced to £6,000 starting from 2023/24, and it is set to decrease further to £3,000 per person in 2024/25. If the capital gain surpasses this threshold, higher-rate taxpayers will be subject to a 20% capital gains tax (or 10% for basic-rate taxpayers).

A notable point to consider is that, as per existing legislation, capital gains currently enjoy favourable tax treatment. The highest capital gains tax rate is 20%, notably lower than the 45% income tax rate (or 60% within the tax trap). It’s worth mentioning that there are discussions about potential increases in the capital gains tax rate, which might align it with the income tax rate, though no changes have been finalized as of now.

Methods to Reduce Capital Gains Tax on Your RSUs”

Immediate Sale Upon Vesting

Opt for selling your shares as soon as they vest. This approach ensures that no taxable gains are realised. You would still need to carry out the calculations and reporting may still be required but it is unlikely that you will have to pay CGT on the disposal of shares.

Should you wish to continue holding the shares, consider repurchasing them within a stocks and shares ISA. This move guarantees tax-free growth in the future, although withholding taxes may still apply, especially if the shares are associated with a US company.

Alternatively, keeping the shares within a Self-Invested Personal Pension (SIPP) ensures tax-free growth and exemption from withholding taxes, provided your pension administrator has appropriately established the setup.

Share Transfer to Spouse

Transferring a portion of your RSUs to your spouse proves advantageous, especially if significant gains have accrued since the shares were vested. Thanks to the inter-spousal transfer exemption, transferring shares to your spouse incurs no tax liability. Subsequently, your spouse can proceed to sell the shares, making use of their individual capital gains tax allowance. This essentially allows you to sell double the shares before capital gains tax becomes applicable.

Implementing these strategies can effectively reduce the impact of capital gains tax on your RSUs, allowing you to retain more of your gains.

For the majority, promptly selling their RSUs upon vesting is the wisest course of action. This decision not only prevents the accumulation of potential future capital gains tax liabilities but also mitigates risks in case unforeseen circumstances arise.

Owning shares in your company essentially means doubling down on your employer. Imagine receiving a cash bonus – would you instinctively choose to invest it in your company’s shares? If your answer leans towards a negative stance, then the logical step would be to divest your shares and consider alternative investment avenues. In essence, selling RSUs upon vesting is akin to safeguarding your financial portfolio and diversifying your investments beyond your company’s stock.

Tax on Grant of RSUs

RSUs do not incur taxation upon grant. The initial point of taxation arises during the vesting phase, triggering both income tax and National Insurance Contributions (NICs). Employers typically manage this through the PAYE system, simplifying the process for RSU recipients.

To settle the tax obligations, most setups involve your employer selling a portion of your vested shares to cover the due taxes. This coverage generally encompasses both employee and employer NICs. To facilitate this, you’ll be required to participate in a joint election with your employer. This election benefits both parties by establishing clarity on the NIC amount, and you, as the recipient, can claim income tax relief. This relief, factored into your PAYE calculations, usually negates the need for Capital Gains Tax during this phase.

If you have a history of working abroad and were granted RSUs prior to your UK arrival, gauging the UK tax liability could be intricate. There’s potential for overpayment, warranting a refund. Similarly, if you relocate internationally and continue to receive RSUs, an ongoing UK tax responsibility might persist for these units.

Even if you’ve always resided in the UK, the issuing company’s location might subject you to foreign tax deductions. However, you might not actually owe taxes in that foreign jurisdiction.

How are RSUs taxed?

If you’re seeking a UK RSU tax calculator, I regret to inform you that such a tool doesn’t exist due to the number of variables involved. RSU taxation for UK employees is not a one-size-fits-all scenario. The specific tax implications hinge on your unique financial situation, your employer’s RSU arrangement, and the vesting schedule.

It’s crucial to note that RSUs aren’t subject to taxation upon issuance; tax obligations arise solely upon vesting. The UK’s RSU taxation aligns with the taxation of your regular income. Upon RSU vesting, you’ll be liable for income tax and employee national insurance contributions. Additionally, you might be required to cover employers’ national insurance contributions. This cost can be borne by your employer or shifted to you based on their discretion.

If you’re responsible for employers’ national insurance contributions, it’s important to subtract this amount from the RSU vesting value when calculating your income tax. Interestingly, when computing your employee’s national insurance, you don’t factor in the deduction of employer national insurance contributions.

Tax on Selling RSUs

The next point of consideration regarding UK taxes arises when you decide to sell the shares you currently possess. If the value of these shares has increased beyond the initial acquisition value, you’ll have a taxable gain. If this gain surpasses the available annual exemption, presently set at £12,300, you’ll be subject to tax on the gain. This gain is essentially the proceeds from the sale minus the original acquisition cost. Sounds straightforward, right? Unfortunately, dealing with RSUs adds a layer of complexity to this process, which your employer is unlikely to assist you with during this phase.

The complexity stems from the fact that shares are acquired at different times. Thus, when you eventually sell them, meticulous matching rules need to be applied to determine the specific shares that are being sold for taxation purposes. This is crucial for calculating the taxable gain and establishing the base cost. Given the varying values of shares at the time of each acquisition, multiple base costs might exist in theory. If the shares were obtained in a non-sterling currency, the consideration of exchange rates further compounds the intricacy.

While certain countries, like the US, follow a “first in, first out” approach for matching shares – a method often reflected in broker-prepared annual statements – the UK generally requires shares to be “pooled” with an average cost per share calculation. Yet, exceptions apply. For instance, if you sell shares and subsequently acquire more within 30 days, you’re deemed to have sold shares that weren’t even acquired at the time of the sale. This complexity can lead to inaccuracies in the figures provided by broker statements, potentially resulting in an incorrect tax assessment for UK purposes.

Given the complex nature of these rules and HMRC’s software limitations, it becomes crucial to comprehend the specific numbers and exchange rates to use when reporting gains from such disposals. Maintaining proper records from the outset is key to ensuring accuracy and avoiding mistakes. We work with a number of clients and maintain these share pools on their behalf.

How can I reduce tax on RSUs?

One effective strategy to minimise the tax burden on your RSUs involves contributing to your pension fund. This approach hinges on the principle that pension contributions lower your ‘adjusted net income,’ subsequently reducing your tax liability and potentially your overall tax rate.

Let’s illustrate this with an example: Suppose your earnings amount to £100,000, and you are granted RSUs worth £25,000. Your total income thus becomes £125,000. The introduction of RSUs pushes your overall income above £100,000, triggering a 60% income tax on these RSUs.

This scenario is commonly referred to as the “60% tax trap.” As your income surpasses £100,000, your Personal Allowance diminishes by £1 for every £2 earned above this threshold. Consequently, in addition to the standard 40% tax, an extra 20% tax is applied to previously tax-free income, culminating in an overall tax rate of 60%.

However, you have the means to sidestep this 60% tax predicament by making contributions to your pension fund. By allocating £25,000 to your pension, your taxable income is effectively lowered to £75,000, and the RSUs’ value remains at £25,000. This results in a total income of £100,000, allowing you to evade the 60% tax charge entirely.

We help high earners ensure compliance with companies house and HMRC. If you need help in submitting your annual reports, please do feel free to get in touch with us by completing the contact us form.