As an FCA regulated financial advisor with over a decade of experience in financial services my specialism is in dealing with high earning tech professionals at companies such as Amazon, Microsoft & Meta to minimise tax on both RSUs and stock options.
The article is split into two parts to represent the two taxable events applicable to RSUs; the first being the income tax payable at the point of vesting & the second being capital gains tax payable on the sale of the stock. It’s worth noting that on most stock options there is no income tax payable unless the exercise price was below the fair market value at inception.
Please contact us if you need help with your RSU Capital Gains, Self Assessment or Tax Planning.
How Does Income Tax on RSUs Works?
When do I Pay Income Tax on RSUs?
Typically stock is taxed as income in the tax year that the stock vests, it’s important to understand when the vesting is complete and if this falls under the double or single trigger regime. Explained below:
Double Trigger – Stock only vests for tax purposes after two triggers are satisfied. The first trigger is time based vesting of the stock & the second is normally a liquidity event such as an IPO.
Single Trigger – Stock is deemed as taxable income at the point of time based vesting.
Double trigger RSUs are much more common in pre-IPO companies where the value of stock can fluctuate more drastically & the asset is significantly more illiquid.
How Much Tax Do I Pay on RSUs?
As we explored above RSUs are taxed as income at there current market value at the point of vest. The result of this is that there are two taxes payable; income tax and national insurance. The rates of tax payable on these are as follows:
Income Tax – Payable at marginal rate of 20%, 40% & 45% dependent on total income.
National Insurance (NI) – dependent on weekly income this will very between 2% or 8% for employee NI contribution & 15% for employer NI.
Do I Pay the Income Tax on RSUs?
If your employer pays what is known as ‘net-shares’ then effectively shares are being sold to cover all income tax implications and you are being provided with the shares net of tax.
This is not always the case & particularly with double trigger RSUs it’s common that the reporting of this income to HMRC & paying the tax can fall upon the employee.
Tip: If your employer doesn’t cover the income tax liability then it may be a good idea to sell the stock at vesting needed to cover any tax liability, any subsequent drop in share value will not reduce the income tax liability. This is known as ‘sell to cover’.
How Can I Minimise Income Tax on My RSUs?
Typically the strategies that we can apply here fall into two categories; product based solutions & income structuring. The main areas in which we provide advice are covered below:
Pension Contributions – One method to reduce the tax burden on RSUs is by making pension contributions. Contributing to a pension lowers your ‘adjusted net income,’ potentially reducing your tax rate and overall tax bill.
For example, if you earn £100,000 and receive RSUs worth £25,000, your total income would be £125,000, pushing you into personal allowance taper. By contributing £25,000 to a pension, your taxable income would decrease to £100,000, helping you avoid paying tax at 60% and seeing a £25,000 investment into your pension.
Tip: If your employer pension scheme is ‘salary sacrifice’ then ensure you make contributions here first, the additional NI saving will normally be worth an additional 2%. Commonly employers will also offer the additional employer NI saving as a pension contribution, worth an additional 15%.
Tax Advantaged Solutions – Typically favored after allowances for pension contributions are fully utilised. Investing into products such as Venture Capital Trusts or Enterprise Investment Schemes can offer income tax relief of up to 30% of any initial investment.
Income Structuring – This involves analysing sources of income to ensure that income can’t be effectively reduced by holding assets more efficiently. This could be as simple as holding cash savings in Premium Bonds so interest earned is tax free or as complicated an incorporating rental property into a limited company
How the Capital Gains Tax Works?
How Much is Capital Gains Tax on RSUs?
Everyone in the UK has an annual exemption of £3,000 PA, this means that any gains realised within this are exempt of tax. Above and beyond this the rate of tax you pay depends on your total income tax position for the year. Above and beyond this the standard rates are:
Income & Gains below £50,000 PA = 18%
Income & Gains above £50,000 PA = 24%
How is Capital Gains Tax on RSUs Calculated?
This tax is calculated as a percentage against the ‘taxable gain’ of a share you’ve sold. In layman’s terms this is the difference between the market value at vesting (or exercise price of an option) & the end sale value.
If we look at the below example for an employee (Tim) who earns £80,000 PA & is a higher rate tax payer.
Tim was awarded 10 shares at a value of £1,000 per share at vest or £10,000 in total.
One year later these shares are now worth £23,000 and Tim would like to sell these, with a gain of £13,000.
The first £3,000 is within his annual exemption and he has a taxable gain of £10,000 & will pay capital gains tax of 24% on this.
Capital Gains Tax = £2,400.
If you’ve had shares that have vested at multiple dates and are only selling part of your holdings the rules on this are more complicated as the assumed purchase price of the shares are calculated using the weighted average, example below:
Tim has 30 shares that have vested in his company 10 at £500 per share, 10 at £1,000 per share & 10 at £1,500 per share. The average of £1,000 per share.
If Tim decides to sell 10 shares at a gross price of £15,000, ignoring his annual exemption his taxable gain would be £5,000.
If you’re in this situation we’d strongly suggest having a no cost discussion as there are additional rules for shares sold within 30 days of exercise or vesting.If you’re in this situation we’d strongly suggest having a no cost discussion as there are additional rules for shares sold within 30 days of exercise or vesting.
How & When do I Pay the Tax?
The burden to pay & report this gain falls solely on the employee and for gains on stocks & shares they must be reported in a self-assessment no later than January 31st of the proceeding tax year.
Can I Manage Capital Gains Tax on RSUs?
There are a number of legitimate ways to avoid or minimise the capital gains tax you pay in the UK & usual tactics include:
Use Spousal Allowances – It’s possible to transfer shares to a spouse without triggering a taxable event, this won’t change the assumed purchase price of the shares but will allow you to access two sets of allowances when selling shares.
Bedding Investments – If at the point of vest or exercise you opt to sell your shares and re purchase them in a tax efficient wrapper (such as a stocks and shares ISA) then future gains will be sheltered from tax.
Timing Sales – Really simply when we choose to sell shares has an impact on all of the above. If you plan to leave the UK permanently then you may be able to hold off selling share until you live in a lower tax jurisdiction. For those who are here for the long-term they may wish to sell over multiple tax years & utilise multiple allowances or even wait until a time they are earning less.
The tax implications of both stock & RSUs require careful planning and strategy. Venn help tech professionals with a comprehensive service why not reach out to us to book a no cost initial consultation.
The above does not constitute financial advice & the information provided may be subject to change, we advise seeking advice from a professional tax advisor.
About the author
Louis is a regulated independent financial advisor with a diploma in financial planning from the Chartered Insurance Institute. He founded his own financial planning firm in 2019 & has specialised in helping high earning individuals on all personal financial matters.
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