RSU Tax & Self Assessment in the UK: A Guide for Tech Employees

Introduction to RSUs: How Do RSUs Work?

RSUs are typically awarded to employees on significant corporate milestones or as part of annual compensation. The key to understanding RSUs lies in two critical dates: the grant date, when the RSU is awarded, and the vesting date, when the rights to the stock become wholly owned by the employee. Most RSUs vest over a period of time, often through a process called “graded vesting,” where a certain percentage of the RSUs vest each year over several years.

For instance, an employee might receive 100 RSUs with a vesting schedule of four years, where each year, 25% of the units vest. If employment terminates before the vesting period completes, typically, the unvested RSUs are forfeited.

Tax Implications at Vesting

In the UK, no tax is due at the grant date of RSUs. Taxes are incurred when the RSUs vest, at which point they are considered taxable income. The income from vested RSUs is subject to both income tax and National Insurance contributions, similar to how regular salary is taxed. Additionally, depending on how the RSUs are structured, there may be liability for employer’s National Insurance contributions, which can sometimes be transferred to the employee. This point is crucial, as it is a common misconception that vesting RSUs are taxed at a much lower capital gains rate of 20% – which is incorrect.

For example, if you receive £50,000 worth of RSUs that vest, and you’re in a high-income bracket, substantial taxes and contributions could significantly diminish the benefit received from the RSUs.

After the RSU has vested, you will now own the stock. The value of the stock at vesting date is now known as the “base cost” for capital gains purposes. If you sell the stock in future, you will be taxed at the capital gains tax rate on the difference between the base cost and the sale price at your marginal rate of capital gains – usually this would be 20%.

Example of how RSUs are taxed:

Suppose an employee is granted 100 RSUs, each worth £100 at vesting, totaling a value of £10,000. Here’s how the taxation might work:

1. At Vesting:
   • The total value of the vested RSUs (£10,000) is considered taxable income.
   • Assuming the employee is in the 40% income tax bracket and pays 2% in employee National Insurance Contributions (NICs), the tax calculations would be:
     • Income Tax: £10,000 x 40% = £4,000
     • Employee NICs: £10,000 x 2% = £200
   • Total Tax and NICs: £4,200
   • Net amount received from RSUs: £10,000 – £4,200 = £5,800
     
     
2. If Sold Immediately at Vesting Value:
   • No capital gains tax is due if the shares are sold immediately at their vesting value, as there is no gain.
     
     
3. If Sold Later at a Higher Price:
   • If the employee holds the shares and sells them later at a higher price, say £150 per share, then the total sale value is £15,000.
   • The capital gain would be £15,000 – £10,000 = £5,000.
   • If this gain exceeds the annual exempt amount (£3,000 for 2024/25), capital gains tax will apply.
   • £5,000 capital gain less £3,000 annual exempt amount = £2,000 capital gain.
     This gain is subject to tax at the employees marginal rate of capital gains tax; usually 20% for a higher rate tax payer.
     In this example £400 of capital gains tax would be due.

This simplified example shows the basic tax implications of RSUs at vesting and when sold, depending on the share price and employee’s actions post-vesting.

Strategies to Mitigate RSU Taxes

There are 4 key strategies to effectively manage tax exposure on RSUs…

1. If you have available ISA allowance (£20,000 in the 2024-25 tax year) then one strategy may be to instantly sell your RSUs once they have vested, and then repurchase the stocks (if you wish to continue investing in your employer) within a Stocks & Shares ISA. This will mean future capital gains and dividends are tax free – as the stocks are held within the tax-free ISA wrapper.
   
   
2. Second, you can transfer your shares at point of vesting to your Spouse – but note, this may not always be possible depending on the company you work for and restrictions on who can hold the shares (typically unquoted companies may face restriction here). This may be beneficial if your Spouse is in a lower income bracket or has an available capital gains annual tax free allowance to utilise (see next bullet point).
   
   
3. Make use of your annual capital gains tax free allowance to realise profits on vested RSUs; although this allowance has been severely reduced in the past few tax years, you still have £3,000 of capital gains tax free allowance to utilise in the 2024-25 tax year.
   
   
4. A final effective way to manage tax liabilities on RSUs is by making pension contributions. Pension contributions can reduce your total taxable income, potentially lowering the tax rate applied to your RSUs. This strategy is particularly beneficial for avoiding the higher tax bands that could apply due to the additional income from RSUs.

Managing Capital Gains

Once RSUs vest and are converted to stocks, they can be sold immediately or held as an investment. If sold immediately, there’s generally no capital gains tax (CGT) because there’s no gain beyond the vesting value. If the shares are held and sold later at a higher price, CGT may apply on the profit – this can be at either 10% or 20% depending on your income level. Planning around the annual CGT allowance and utilising strategies such as transferring shares to a spouse (as outlined above) can help minimise CGT liabilities.

What Should You Do With Your RSUs?

The decision to sell or hold RSUs post-vesting depends on personal financial goals, tax considerations, and market conditions. Immediate sale reduces exposure to potential stock depreciation and diversifies financial risks. Holding the shares might be preferable if long-term growth is anticipated.

How Can We Help?

Managing RSUs requires careful planning to optimise the benefits while minimising tax liabilities. There are also complex Share Pooling calculations which need to be taken into account.

ESDG Accountancy can assist on both completing your personal tax returns to report your RSUs to HMRC, as well as ensuring you get the best advice for managing your tax planning around RSUs.

Please contact us if you think we can help – we welcome all enquiries.

FAQ Section

What are Restricted Stock Units (RSUs)? RSUs are company promises to grant shares at no initial cost to employees, which become fully owned after meeting certain conditions known as “vesting”.

How are RSUs taxed in the UK? RSUs are taxed upon vesting, not at the grant. They’re treated as income, subject to income tax and National Insurance contributions. Future gains in value are then taxed at the capital gains marginal rate once sold.

Can I reduce the tax impact of RSUs? Yes, making pension contributions or transferring your stocks on vesting into a Stock ISA is a common strategy to reduce the tax burden by lowering your taxable income.

Do I have to pay capital gains tax on RSUs? If you sell the shares immediately upon vesting, there’s typically no capital gains tax. If sold later at a higher value, capital gains tax could apply. Most UK taxpayers have a £3,000 available tax free allowance each year for capital gains tax.

Should I sell my RSUs as soon as they vest? Selling immediately can mitigate risk and simplify tax matters, but holding onto the shares might be beneficial if expecting significant stock value increases. Your personal circumstances here are key.

Contact Us…

If you would like help with a RSU self-assessment tax return or advice on managing your RSU tax exposure, please get in touch using the form below or on our contact page.