Restricted Stock Units, or RSUs, are shares of stock that are granted to employees by US companies. With many American companies with UK subsidiaries, it’s common for stock awards to be part of the remuneration of employees. US-based employees sometimes transfer to work in the UK, so how are they taxed for those receiving these awards.
UK Tax of RSU’s
For employees in the UK who are on the Pay As You Earn (PAYE) system, Restricted Stock Units (RSUs) are taxed in a specific manner.
Taxation at Vesting
When RSUs vest (i.e., the shares are transferred to the employee without any restrictions):
- Income Tax:
- The market value of the shares at the time they vest is treated as employment income.
- This income is subject to Income Tax at the employee’s marginal rate (the rate applicable to their total income).
- National Insurance Contributions (NICs):
- Both the employee and the employer must pay NICs on the value of the RSUs at vesting.
- For employees, this is the Class 1 NICs, which are the standard employee contributions.
- Employers also pay Class 1 secondary NICs on the same amount.
PAYE Withholding
Since the employee is on the PAYE system, the employer is responsible for deducting the appropriate taxes and NICs at the point of vesting:
- Tax Deduction:
- The employer will withhold the necessary Income Tax and NICs through the PAYE system.
- The amount withheld will be based on the value of the vested RSUs and the employee’s tax code.
- Reporting:
- The employer reports the value of the vested RSUs and the tax withheld to HMRC (Her Majesty’s Revenue and Customs).
- This is included in the employee’s end-of-year P60 form, summarizing total earnings and tax paid.
3. Taxation at Sale
When the employee sells the shares acquired through RSUs:
- Capital Gains Tax (CGT):
- Any gain made on the sale of the shares is subject to CGT.
- The gain is calculated as the difference between the sale price and the market value at the time of vesting (which is treated as the acquisition cost).
- Employees benefit from the annual CGT allowance, which can reduce the taxable amount.
- CGT rates depend on the employee’s total taxable income and gains for the year and are typically lower than Income Tax rates.
Example Calculation
- At Vesting:
- Employee receives 100 RSUs that vest when the share price is £50.
- The total value at vesting is 100 * £50 = £5,000.
- This £5,000 is treated as employment income.
- Assuming a 20% Income Tax rate and 12% employee NICs:
- Income Tax: 20% of £5,000 = £1,000.
- NICs: 12% of £5,000 = £600.
- Total tax and NICs withheld: £1,000 + £600 = £1,600.
- At Sale:
- Later, the employee sells the 100 shares for £70 each.
- Sale proceeds: 100 * £70 = £7,000.
- Gain: £7,000 – £5,000 (market value at vesting) = £2,000.
- If the gain is within the CGT annual allowance, no CGT is payable. If not, CGT is applied to the amount exceeding the allowance at the applicable rate (10% or 20%, depending on the total income).
RSUs granted in the US
In general, the granting of shares, including RSUs, does not trigger an immediate tax liability in the UK. Taxation usually occurs at vesting, not at the granting stage. There is no tax liability when the RSUs are initially awarded because the employee does not have access to or control over the shares until they vest.
Knowing the vesting points of RSUs
Vesting is the process of gaining full legal rights to something or when you take control of the shares. The most common practice is that RSU granted vest at a rate of 25% each year over the course of four years. So if the marginal tax rate or the Fair Market Value of the shares changes over the four years, the income tax calculation would adjust accordingly each year. For accurate planning, employees should consider potential changes in their tax rates and the value of their shares. At the time of writing Google and Meta (facebook/instagram) follow this vesting schedule. It’s different for Amazon, where the percentage in year one is 5%, 15% year 2 and the balance evenly in year 3 and 4.
Remittance-based taxation of RSUs
In the UK, the default taxation for residents is income, and gains are taxed as they arise. Under the arising basis, UK residents are taxed on their worldwide income and gains as they arise. This means any income or capital gains earned globally, whether remitted to the UK or not, are subject to UK tax. Those who live in the UK but do not have a permanent home here — in the case of the UK, this applies mainly to non-domiciles – can choose the remittance basis for their taxation. On the remittance basis, only UK source income and gains are taxed on an arising basis. Foreign income and gains are taxable only if they are remitted (brought into or used in the UK). This means such people can plan to not be subject to UK tax on their foreign income and gains if they keep them outside the UK. The remittance basis is not automatic; it must be claimed on the tax return. If the RSUs relate to foreign employment, the income may be considered foreign income. Under the remittance basis, this would only be taxed if remitted to the UK. An individual claiming a remittance basis for taxation (by completing the Self Assessment Tax return (SA100), in order to claim the ‘remittance basis’) will not pay tax on the unremitted RSUs. If the RSUs vest while the individual is UK tax resident, the income from the vesting RSUs is considered UK source income and is taxed on the arising basis.
Is it worth getting financial advice on my RSUs?
An employer may want to offer their employees financial advice for RSUs or employee vesting their shares may want to get financial advice for some of the reasons below.
RSUs area taxed as if they were income, in the year that they are earned. That is, they will be added to total income and taxed at your marginal rate (ie, the portion of your income going to tax), on top of your basic salary. Employees might not be aware that their RSUs are also taxed through National Insurance Contributions (NICs) and, when they are sold, through Capital Gains Tax (CGT) on the increase in value. Getting assistance to reduce marginal tax rate and also capital gains tax allowances can help to be tax efficient, an area financial advice can really benefit you.
It’s not uncommon for an employee with exceptionally generous RSUs from his or her employer to have a material portion of an individual’s net worth concentrated in the stock of one company. What happens if the stock price of that company declines? There is also other potential problems with concentration of wealth in the employers stock:
- Market Risk:
- Stock Price Volatility: Because the value assigned to an RSU is based on a company’s stock price, which fluctuates, a downturn in the price can significantly reduce the employee’s wealth.
- Single Point of Failure: Putting eggs into a single basket carries great financial risk to the employee if the company itself runs into business problems or endures a downturn in the market.
- Financial Health of the Company:
- Company Performance: Employee financial success is largely tied to the health of the company. If the firm doesn’t perform well, stock-based compensation (as well as overall financial wellbeing) will suffer.
- Lack of Diversification:
- Risk in Investment: For general advice to clients, financial advisors often recommend to diversify investments to balance risk. It contradicts the principle of accumulating wealth in a single company stock and eventually leads to lop-sided asset portfolios.