Taxd

RSU Tax UK and Self-Assessment: A Tech Employee's Guide

Restricted Stock Units (RSUs) have become a popular type of remuneration, particularly in technology businesses. They act as an incentive, aligning workers' interests with those of the firm by including shares in the pay package.

arj
Arjun Kumar
Founder
Jun 29, 2024
Instagram GrayLinkedin Icontwitter Icon

Restricted Stock Units (RSUs) have become a popular type of remuneration, particularly in technology businesses. They act as an incentive, aligning workers' interests with those of the firm by including shares in the pay package.

However, although RSUs may be a profitable component of your remuneration, they may have significant tax implications, especially in the United Kingdom. This tutorial seeks to help IT workers understand RSU tax UK and the self-assessment procedure.

What is an RSU?

Restricted Stock Units are company shares that workers get as part of their remuneration package. Unlike stock options, which allow workers to buy company stock at a fixed price, RSUs are granted outright but with limitations. These limits often include a vesting period, which is the amount of time an employee must wait before gaining full ownership of their shares.

Vesting Period

The vesting time is an essential component of RSUs. It might be time-based, performance-based, or a mix of the two. For example, a typical time-based vesting plan may issue 25% of the RSUs each year for four years.

Taxation of RSUs in the UK

In the UK, RSUs are taxed at two points:

At Vesting: When the RSUs are vested, and the employee gets the shares.

At Sale: When an employee sells their shares.

Tax at Vesting

When RSUs vest, they become income and are liable to Income Tax and National Insurance Contributions (NICs). The amount subject to tax is the market value of the shares at the time they vest. This is classified as employment income and taxed appropriately.

Example:

Assume you get 1,000 RSUs, and the market value at the time of vesting is £50 per share. The taxable amount is £50,000 (1,000 RSUs multiplied by £50). This payment will be subject to Income Tax and National Insurance Contributions.

Tax on Sale

When you sell the shares, you may be liable to Capital Gains Tax (CGT) on any gain in value after the vesting date. The gain is computed by subtracting the selling price from the market value at the time of vesting.

Example:

Continuing with the preceding example, if you sell the shares for £70 a share, the profit is £20,000 (1,000 shares x (£70 - £50)). This sum is subject to the CGT.

Tax Rates

Here are the different tax taxes you must know:

Income Tax

Income from RSUs is taxed at your marginal tax rate, which may be:

  • 20% for basic-rate taxpayers.
  • 40% for higher-rate taxpayers.
  • 45% for additional-rate taxpayers.

National Insurance Contributions (NIC)

The NICs have different rates, such as:

  • 8% on the income between Primary and Upper Earning Limit
  • 2% on the income over the Upper Earning Limit

Capital Gains Tax

The capital gains tax rates are:

  • 10% for basic-rate taxpayers.
  • 20% for higher and additional-rate taxpayers.

In addition, there is an annual CGT allowance (£3,000 for the 2024/25 tax year) that may be used to offset profits.

What is Self-Assessment?

HM Revenue and Customs (HMRC) employs self-assessment to collect income tax. Taxpayers with complicated tax affairs, including those who get income from RSUs, must file a self-assessment tax return each year.

Registering for Self-Assessment for RSU Tax UK

If you need to declare RSU income, you must sign up for self-assessment with HMRC. This can be completed online if you have a tax account with HMRC. You can register here. Ensure you register by October 5th, following the end of the tax year in which you received the RSUs.

If you are outside the UK, you need to print and post an SA1 form to HMRC. You can find the form and further instructions here.

Completing the Tax Return

Here are the essential pages of tax return form:

Employment Pages

Income from vested RSUs should be shown in the employment part of your tax return. Your employer should give a P60 or comparable paperwork indicating the taxable amount and any tax previously paid via PAYE (Pay As You Earn).

Capital Gains Pages

If you sell your RSU shares, you must declare the capital gain in the Capital Gains section of your tax return. You will need to compute the gain as previously indicated and apply any CGT allowance.

Note: This part will not apply to you if you are not living in the UK and are non-resident for UK tax purposes.

Residency Pages

If you are not living in the UK but earned RSUs linked to UK workdays, they remain taxable in the UK. In this case, you must file a non UK resident tax return and include the SA109 Residency pages to declare your non-residency status to HMRC.

Deadlines

October 31st: For paper tax returns.

January 31st: Submit online tax returns and pay any outstanding taxes.

Paying Your Tax

If your extra tax payable is less than £3,000 and you file your return online before December 30th, HMRC may change your tax code to collect the tax via PAYE. Otherwise, you must pay the tax by January 31st, after the end of the tax year.

Common Pitfalls and How to Avoid Them

Here are the most common pitfalls and how to avoid them:

Double taxation

If you work for a global corporation and get RSUs while working overseas, you may think you are being taxed twice. The UK has double tax treaties with a lot of countries which will avoid this from happening. Generally, it will be taxed first where the work has taken place. Do consult an expat tax advisor for more details.

Ignoring NICs

NICs on RSU income can be significant. Ensure you understand how NICs apply to your RSUs and plan accordingly.

Currency fluctuations

If your RSUs are denominated in a foreign currency, exchange rate variations may influence the value of your shares as well as the amount of tax owed. Check currency rates and think about utilising forward contracts or other hedging measures.

How Can I Reduce Tax on RSUs? Do I Pay Capital Gains Tax on RSUs?

One effective strategy to reduce RSU tax bills and rates is making pension contributions. Contributions lower your 'adjusted net income, thereby decreasing both your tax bill and rate of taxation.

Assume you earn £100,000 and are awarded RSUs totaling £25,000; this would result in total earnings of £125,000. Because RSUs push your total income above £100k, a 60% income tax will apply to them.

This phenomenon is known as the 60% tax trap: for every £2 you earn over £100,000, your Personal Allowance decreases by £1, meaning you not only pay 40% in tax but also an extra 20% (making the overall tax rate 60%).

By making pension contributions, you can avoid this 60% tax charge and bring your total income below £100,000. Doing so means that for tax purposes, you would have earned £75,000 while receiving RSUs worth another £25,000, and thus, not having to pay that additional 60% charge.

How Can I Reduce Capital Gains Tax on my RSUs?

There are two strategies available to you to minimise capital gains tax.

  1. Sell the shares upon vesting to avoid tax liabilities. Alternatively, if you prefer holding onto them longer-term, consider purchasing them back into an ISA to ensure future growth is tax-free (though any withholding taxes that apply may still apply - whereas holding shares in a SIPP means any future growth is fully exempt from withholding tax).
  1. Transferring some RSUs to your spouse. This strategy can be especially helpful if your shares have experienced substantial growth since vesting; no taxes will be owed when transferring shares to them due to the inter-spousal transfer exemption; they can then take advantage of their capital gains tax allowance when selling them later.

Contact Taxd now for advice on how best to manage and plan for the tax implications of RSU shares, as well as future tax planning strategies.

Example of How RSU are Taxed in the UK

Let's examine how RSUs are taxed in the UK with an example:

Scenario: An employee receives 150 RSUs, each worth £80 at vesting, totalling £12,000.

Vesting of RSUs at Vesting

The total value of RSUs (£12,000) will be treated as taxable employment income and falls into the 40% income tax bracket; they will pay 2% employee National Insurance Contributions (NICs).

  • Income Tax = 40% = £4,800
  • Employee National Insurance Contributions (NICs) = 2% of £12,000 = £240
  • Total of Tax and NICs = £5,040

In the end, you would net £6,960 as net revenue after taxes have been deducted.

If Shares Are Sold Directly at Vesting Value

When an employee sells shares directly for £80 each at vesting value, there will be no capital gain and thus no Capital Gains Tax (CGT) applies.

What If Shares Are Sold Later at a Higher Price

Imagine an employee holding onto shares and selling them when the price increases to £100 per share later; their total sale value then becomes:

Sale Value = 150 shares at £100 each = £15,000

Capital Gain: £15,000 - £12,000 = £3,000

If the Capital Gain exceeds the annual Exempt Amount (currently £3,000 for 2024/25), any excess beyond this amount is subject to tax. The Taxable Portion would consist of:

Taxable Gain (excluding Reinvestment) = £0

In the event that shares are sold later at an increased price (i.e., £120 per share), then their new sale value would be:

  • Sale Value = 150 shares at £120 per share = £18,000
  • Capital Gain = £18,000 - £12,000 = £6,000 (subtracting annual Exempt Amount).

Taxable Gain: £6,000 - £3,000 = £3,000

The CGT rate for higher-rate taxpayers is 20%; therefore:

Capital Gains Tax Due: £3,000 × 20% = £600

Tip: To ensure optimal tax liabilities, consult with a tax professional or utilise double taxation relief where applicable.

Bottom Line

RSUs may be essential to your pay plan, but they have significant tax ramifications. Understanding how RSUs are taxed in the UK, maintaining proper records, and strategically planning your transactions will help you efficiently manage your tax bill. Remember to register for self-assessment, record any applicable income and profits, and pay all required taxes on time. Seeking expert guidance might also help, especially if your case is complicated. If you are looking for assistance, contact Taxd. We have the right experience and can help you understand the intricacies.

FAQs

1. What is RSUs (Restricted Stock Units), and how are they taxed in the UK?

RSUs are restricted stock units granted to employees as compensation by employers in certain industries, such as technology. They have vesting conditions attached and may only be granted under certain circumstances.

RSUs in the UK are taxed as employment income when they vest, based on their market value at time of vesting and are subject to Income Tax and National Insurance Contributions (NICs). Additional taxes may also apply if shares are later sold at a gain.

2. Should RSU income be reported on my self-assessment tax return?

In the UK, RSU income must be reported on your self-assessment tax return. Once RSUs vest, they should be treated as employment income, which should already be included in your employer's PAYE system. However, if there are any discrepancies or additional income (such as dividends or capital gains from selling RSUs), any discrepancies or additional income ( such as dividends or capital gains from selling RSUs ), then any such amounts should also be added to your self-assessment tax return.

3. How are Capital Gains from RSUs taxed in the UK?

Any profits realised upon selling RSU shares after they vest are subject to Capital Gains Tax (CGT), calculated as the difference between their sale price and value at vesting.

At the start of each tax year (currently £6,000 in 2024/25), an annual CGT allowance may be deducted from total gains; any amounts exceeding this threshold are taxed at either 10% or 20%, depending on your total income and tax bracket.

4. What are some common mistakes to avoid when reporting RSUs in the UK?

  • Forgetting to Include RSU Income in Self Assessment: Even though employers report RSU income through PAYE, individuals need to verify and report it themselves so as to prevent underreporting of income.
  • Misclassification of RSUs: Confusing RSUs with other share schemes, such as EMI or SAYE, may lead to errors in reporting.
  • Overlooking CGT: Failure to account for gains when selling shares can incur fines; failing to report gains when selling them off can have even worse repercussions.

  • Missed Deadlines: Filing late or inaccurately may result in penalties from HMRC.

5. Are there any tax reliefs or allowances available to RSU holders in the UK?

Yes, several potential reliefs may apply:

  • Capital Gains Tax Allowance: You may offset up to £6,000 of gains during the 2024/25 tax year against capital gains tax (CGT).
  • Spouse Transfers: Shares can be transferred tax-free between spouses in order to utilise each partner's CGT allowance.
  • Double Taxation Relief: If RSUs were taxed in another country prior to being brought back into the UK, relief may be available under double taxation treaties.
arj
Arjun Kumar
Founder
Arj is ATT qualified with over 8 years’ experience developing products and propositions, as well as leading global networks of technology teams. He’s a former manager at PwC.

Like the article? Share it with your friends!

Instagram GrayLinkedin Icontwitter Icon
Blog

Latest news

Check out our latest product and company updates, interviews, useful resources and more.
Your personal, digital accountantExpertise you can rely on for easy tax filing