Restricted Stock Units explained: How to navigate your RSUs wisely
Unsure how to manage your RSUs?
A restricted stock unit (RSUs) is a promise from an employer to an employee to transfer shares (or make a cash payment) at a future date, typically after time or performance vesting requirements have been met.
RSUs are a way of employers rewarding their employees with investments and have increasingly gained in popularity in recent years. Typically, this form of reward is seen within the tech industry and is a method of engaging and incentivising employees as employees have to wait a certain period of time for those shares to vest.
When you’re offered RSUs as a form of compensation, your RSU agreement will explain how many shares you’re set to receive and their vesting schedule. For example, suppose your RSU agreement states that you’ve been granted 100 RSUs vesting annually in equal portions over 4 years. Each year, you would vest 25 shares, which will be worth whatever the share price is on the vesting date.
RSUs are fantastic for building for your future but it’s crucial to understand the tax consequences and protect your plans, especially when you have an investment timeline in mind. Reviewing and understanding your live position helps you make those decisions.
Georgina Shaw, Manager
Over time, RSUs can become a significant part of your overall income and net worth. At Price Bailey we understand how critical it is to understand how they function, how they are taxed and a strategy for managing them. Should you have any questions for our experts please get in contact below.
Frequently asked questions
And what exactly is vesting?
Simply, vesting refers to the process through which employees gain the right to the RSUs granted to them over a set period. This process is often dependent upon meeting conditions such as length of service or performance milestones. Until the RSUs vest, employees do not have full ownership or rights to the RSUs.
And what happens once RSUs vest?
Typically once RSUs vest, you can sell your shares immediately with no gain and therefore with no additional taxes to pay. In some circumstances, there may be restrictions on when you can make the first sale, referred to as the ‘lock up period’. This is often the case with newly public companies.
If you decide to hold onto the shares, you may pay capital gains on RSUs when you come to sell them.
If you leave the company before your RSUs vest, you typically forfeit any unvested units, and you may have to resell even vested stock to the company. This all depends on your specific arrangements.
How are my RSUs taxed?
RSUs aren’t subject to taxation upon issuance; tax obligations first arise upon vesting. You will have to pay income tax and national insurance on the value of the vested shares within that tax year at your marginal rate.
Income tax
The first time that you are required to pay tax on your RSUs is upon vesting, at which time both income tax and NIC are due. Employers will usually deal with this under PAYE so initially there is nothing you must do. However we find that a due diligence check is worthwhile, just for additional piece of mind.
It is important to check your tax code especially within the first year of shares vesting when your marginal tax rate and allowances may be affected. Should you be concerned that your tax code is wrong, the team at Price Bailey can offer support and discuss directly with HMRC.
Georgina Shaw, Manager
Capital Gains Tax (CGT)
Should you sell your RSU’s immediately, there will be no CGT. However, 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 CGT.
Every individual has an annual CGT 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% CGT (or 10% for basic-rate taxpayers).
Even if you make a loss on the sale of your shares, it is worth declaring this to HMRC so you can benefit from it in the future.
Overseas tax
If you have previously worked overseas and were granted RSUs prior to coming to the UK, then how much tax is due in the UK may be more complicated to calculate, and you may find that you overpay your taxes in the UK and could be due a refund. If you should relocate overseas and continue to receive RSUs, you may also have an ongoing UK tax liability on these.
How can Price Bailey advise on RSUs?
Price Bailey offers guidance tailored to your individual circumstance, whether it be assisting with interpreting the reports that are provided by your investment platform to interpret your RSUs status, monitoring your RSUs CGT position, or ensuring the correct base cost is used.
Should you have any queries regarding your RSUs please contact one of our experts using the form below…
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.