If you have some level of seniority within your company, you may be receiving a type of equity based pay called Restricted Stock Units “RSUs”. These are effectively shares within the company that are “granted” and then “vest” at certain intervals. It is quite usual for large US based tech companies to award these. They could end up forming a large part of your income and in some cases, your net worth. Here are seven things you can do with your RSUs.
RSUs explained
Restricted stock units (RSUs) are shares in your employers company that are granted to you as part of your total compensation. To have the shares “granted” is the first stage of the process, at this point you cannot do anything with the shares. The shares then “vest” at a later date, often times in set intervals over a period of time. For example, 20% every year. Why do companies do this? It is to keep employees incentivised and it’s a form of golden handcuff. For example, if you have granted stock worth £100,000 that is vesting at 20% each year, you are more likely to stay with the company so that you can receive the remaining “unvested” stock. If you leave, you are in most cases unable to keep the unvested stock. In addition, you are incentivised to work harder in order to help the company perform and meet it’s targets.
Once the RSUs vest, income tax becomes due on them and you will hold the remaining amount of stock. At this point you can either sell the shares immediately, or you can hold onto them. Of course, if you hold onto them you will be subject to Capital Gains Tax (CGT) on the difference between the vested price and the price you sell them for.
1. Sell your RSUs
When your RSUs vest you will need to pay tax similar to that due on your regular PAYE income. In that sense RSUs are effectively another cash payment that you can either opt to keep invested within company stock or sell to provide further income. You will pay capital gains tax (CGT) on the difference between the vested value and the ultimate value when you sell the shares and so by selling them immediately you are likely to limit the CGT you pay.
2. Contribute to your pension
If you are being awarded RSUs then the likelihood is you are paying higher or additional rate tax at 40 or 45%. Pension contributions are a great way to reduce your net income and save you money. For example, for a higher rate tax payer, a £10,000 contribution would only cost £6,000! You would pay £8,000 into your pension and receive £2,000 from the government as tax relief. The remaining £2,000 would be claimed via HMRC. If you have maximised your pension contribution annual allowance, you could consider investing into your partners pension for them and they could receive some tax relief – up to certain limits.
3. Contribute to your ISA
As just mentioned, if you are being granted RSUs you are likely a high earner and so you may have already maximised your pension contributions or have a tapered annual allowance. The next best thing is to utilise a Lifetime ISA (if you are under 40) or a Stocks & Shares ISA and invest the proceeds into a more diversified investment. If you have a large part of your net worth linked to company stock, you could be leaving yourself exposed.
4. Diversify away from your RSUs
You may have a very strong conviction in the company you work for and envisage the shares going “to the moon!”. Holding onto the shares is quite a risky strategy as these RSUs can often represent a large portion of your net worth and since your salary is linked to the performance of your employer, you may not want your net worth to be directly correlated with them too. Consider more diversified investment funds, as these invest into a number of stocks across various sectors, geographic locations and industries.
5. Hold the company stock more tax efficiently
If you are still adamant you want to hold onto your company stock, try and be tax efficient. You could sell the stock on the day it vests and use the proceeds to buy the shares within your pension or your ISA. Doing so would mean you could benefit from some tax relief on the pension contributions and avoid any CGT on further gains.
6. Pay down your mortgage
If you have maximised all of your allowances, you can look into VCTs and other esoteric investment strategies, if you have the appetite for them. If you’d rather play it safe, with interest rates as high as they are, it may be worth looking into overpaying your mortgage. You’ll get an instant risk free return and no tax liability on the interest saved. Any savings outside of ISAs and pensions are likely to attract income tax for you and so paying the mortgage down might be a more tax efficient way of using the cash. You could also consider an offset mortgage, we’ll explain these in a bit more detail in another article.
7. Consider investing into Venture Capital Trusts
If you have explored all of the above and would like to consider investing further, you could consider utilising Venture Capital Trusts (VCTs).
VCTs are investment companies that are listed on the London Stock Exchange and invest in small UK businesses that meet very specific criteria. To encourage investors towards these businesses the UK Government offers tax benefits for investors. The tax breaks that are offered are there because of the very high risk nature of investing into these companies. They are often much more risky than a fund that may track the FTSE100 or the S&P500.
You can claim up to 30% income tax relief on the amount you invest, providing you retain the shares for at least 5 years. So if you invested £100,000 you could reduce your tax bill by £30,000! They also benefit from tax free capital gains and dividends. A word of caution though, they are much higher risk than traditional stock market investments and you should really do your research before you invest. If you are not comfortable doing so, be sure to contact an independent financial adviser who can assist you.
To find out more on VCTs visit Guide to venture capital trusts | Octopus Investments
There you have it, seven things you can do with your RSUs. If you would like to discuss any of the above with a local independent financial adviser in Rayleigh, then please get in touch. Not local? We’re always happy to meet via video conferencing.
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E: p.denning@sterlingandlaw.com
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