Skip to main content

What are RSU shares and how are they declared on a tax return?

By 14/11/2023November 22nd, 2023No Comments
RSU shares Direct Peak

Restricted stock units (RSUs) are a form of equity compensation for employees. It is a promise from your employer to give you shares in the company in the future. RSUs are a popular form of compensation mainly at large US technology companies, including Google, Microsoft & Amazon.

RSU shares can become a significant part of your overall income and net worth, based on the performance of the company you work at. It’s crucial to understand how they work, how they are taxed and have a strategy in place for managing them.

How do RSU’s work?

RSUs are awarded to employees at key events. Many large technology companies, including Microsoft and Google, provide new employees with RSUs when joining the company. They may also be awarded annually or depending on company performance.
There are two key dates to bear in mind with RSUs, the grant date, and the vest date. The grant date is when the RSU is awarded. The vest date is when the RSU becomes available and can be sold if needed. Typically, RSUs vest over a period of time, rather than all at once.
For example, assume that you start working at Google in August 2023. When you join the company, you are provided with 100 restricted stock units, with a four-year vesting period. Each year, 25% of the RSUs vested.

In this example, 25 shares will vest after one year, a further 25 after the second year and so on.

  • 2023 – Granted 100 shares
  • 2024 – 25 Shares vested
  • 2025 – 25 Shares vested
  • 2026 – 25 Shares vested
  • 2027 – 25 Shares vested

If you are awarded additional RSU’s at a later period, and can vest them in the same period as the previous vested shares, this will create a ‘vesting cliff’, which means that a single year contains multiple vesting periods.

How are RSU’s taxed?

The exact tax treatment will depend on your individual financial circumstances, how your employer has set up the RSUs, and the vesting schedule.

In all cases, there is no tax to pay when RSUs are granted. You only pay tax on RSUs when they vest. The UK tax treatment for RSUs is similar to how your salary is taxed. When your RSUs vest, you will pay income tax and employee national insurance. You may also need to pay for employers’ national insurance. Employers have the discretion to either pay this themselves or transfer the liability to you.

If you are liable for employers’ national insurance, then you will need to deduct this from the RSU vest value when working out your income tax. Confusingly, you don’t deduct the employer national insurance when working out your employee national insurance.

I have included the below example showing receipt of £50,000 of RSU’s received based on the fact you are a higher rate tax-payer as follows;

  • RSU Value at Vesting – £50,000
  • Less: Employer NIC (13.8%) – (£6,900)
  • Less: Income Tax (40%, After ER NIC) – (£17,240)
  • Less: Employee NIC (2%) – (£1,000)
  • RSU Value after tax – £24,860
  • Tax rate paid % – 50.28%

It shows that after paying all taxes, you will be left with just £24,860 from RSUs worth £50,000. In most circumstances, the tax will be paid before you receive the shares (e.g., you will receive the net amount after withholding taxes).

How can I reduce tax on RSUs?

One way to reduce how much tax you pay on RSUs is by making pension contributions. This is because paying into a pension reduces your ‘adjusted net income’, which in effect reduces your tax bill and potentially your overall tax rate.

For example, assume that you earn £100,000 and receive RSUs of £25,000. This gives you a total income of £125,000. Because the RSUs push your total income above £100,000, you will pay 60% income tax on the RSUs.

This is known as the 60% tax trap. For every £2 you earn above £100,000, your Personal Allowance is reduced by £1. This means that in addition to paying the normal 40% tax, you also pay an additional 20% tax on income that was previously tax-free, resulting in a total tax rate of 60%

You can avoid paying this 60% tax charge by making a pension contribution. If you pay £25,000 into a pension, for tax purposes you will have earned £75,000 and receive RSUs of £25,000. This gives you a total income of £100,000 and means that you will avoid paying the 60% tax charge.

Do I pay capital gains tax on RSUs?

Once RSUs vest, you can sell the shares immediately. There will be no additional taxes to pay if you do this. However, if you decide to hold onto the shares, you may pay capital gains on RSUs.
If the value of the shares increases between when they vest and when you sell them, you will have made a capital gain. Depending on how big the gain is, you may need to pay capital gains tax.

How can I minimise capital gains tax on my RSUs?

There are two ways to minimise capital gains tax.

1. Sell the shares immediately upon vesting. This ensures that there is no gain to tax. If you still want to hold the shares, you could buy them back in a stocks and shares ISA. This ensures that any future growth is tax-free (although you may still pay withholding taxes, particularly if the shares are held in a US company). If you hold the shares within a SIPP, any future growth is tax-free and no withholding tax will apply.
2. Transfer some of your RSUs to your spouse. This is particularly useful if you have accrued large gains on the shares since vesting. There is no tax to pay when transferring shares to your spouse, thanks to the inter-spousal transfer exemption. Your spouse can then sell the shares, making use of their capital gains tax allowance.

In effect, this enables you to sell double the shares before capital gains tax becomes payable.
Get in contact with Direct Peak today to help advise you on the best way to manage your RSU shares, and your future tax planning strategies.