Long Term Incentive Plan
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kidmugsy
Posts: 12,709 Forumite
in Cutting tax
I've been asked and I pass the question on here. The young man concerned is to become a member of an LTIP. His employer is an American corporation: he lives in the UK and pays UK income tax by PAYE.
The deal is that he gets some company shares attributed to him and if he's still with the company in 3 years time these shares will materialise in a stockbrokers account in his name, so that he can sell them or keep them as he likes. These shares, which are only notional until the account receives them, are referred to as RSUs (reserved stock units).
It seems obvious to me that the value of those shares in 3 years time will be in the nature of earnings and should logically be subject to UK income tax rather than Capital Gains Tax. But is that the law of the land?
The deal is that he gets some company shares attributed to him and if he's still with the company in 3 years time these shares will materialise in a stockbrokers account in his name, so that he can sell them or keep them as he likes. These shares, which are only notional until the account receives them, are referred to as RSUs (reserved stock units).
It seems obvious to me that the value of those shares in 3 years time will be in the nature of earnings and should logically be subject to UK income tax rather than Capital Gains Tax. But is that the law of the land?
Free the dunston one next time too.
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Comments
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I've been asked and I pass the question on here. The young man concerned is to become a member of an LTIP. His employer is an American corporation: he lives in the UK and pays UK income tax by PAYE.
The deal is that he gets some company shares attributed to him and if he's still with the company in 3 years time these shares will materialise in a stockbrokers account in his name, so that he can sell them or keep them as he likes. These shares, which are only notional until the account receives them, are referred to as RSUs (reserved stock units).
It seems obvious to me that the value of those shares in 3 years time will be in the nature of earnings and should logically be subject to UK income tax rather than Capital Gains Tax. But is that the law of the land?
yes, share price at date they become unconditional entitled to the shares is treated as earnings and taxed through PAYE (can lead to him having to pay a large sum of cash to his employer to keep the shares.0 -
Income tax and NI.0
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Amplifying this slightly...martinsurrey wrote: »yes, share price at date they become unconditional entitled to the shares is treated as earnings and taxed through PAYE (can lead to him having to pay a large sum of cash to his employer to keep the shares.
The value of vested RSUs is liable to NI, both employer's and employee's. The employer is also entitled to take their share of NI from the proceeds, and most do, so reckon on perhaps 15.8% lost to NI. The employer's NI can be deducted (though not credited) for tax, but the remainder is then liable to tax at marginal income rates, so perhaps 40%. Putting these together comes to just about half the value of the shares.
Most (perhaps all) employers will withhold a portion of RSUs on vesting to cover the above; more specifically, they have the broker do it for them. When they do, they withhold at a flat rate that guarantees it will cover the taxes even for their highest rate taxpayers, so perhaps 57%. The balance from over-withholding usually comes back later to the employee as a small bump in salary around two pay cycles later.
TL;DR -- Expect to be shocked to eventually lose 50% or more of this RSU grant to tax and NI, and expect to be both puzzled and aghast at the eye-watering tax withholding that gets applied when RSUs vest.0 -
Amplifying this slightly...
The value of vested RSUs is liable to NI, both employer's and employee's. The employer is also entitled to take their share of NI from the proceeds, and most do, so reckon on perhaps 15.8% lost to NI. The employer's NI can be deducted (though not credited) for tax, but the remainder is then liable to tax at marginal income rates, so perhaps 40%. Putting these together comes to just about half the value of the shares.
Most (perhaps all) employers will withhold a portion of RSUs on vesting to cover the above; more specifically, they have the broker do it for them. When they do, they withhold at a flat rate that guarantees it will cover the taxes even for their highest rate taxpayers, so perhaps 57%. The balance from over-withholding usually comes back later to the employee as a small bump in salary around two pay cycles later.
TL;DR -- Expect to be shocked to eventually lose 50% or more of this RSU grant to tax and NI, and expect to be both puzzled and aghast at the eye-watering tax withholding that gets applied when RSUs vest.
While this can be true, its not necessarily true, my employer doesn't claw back NI and offers the option to self fund the tax so you can keep 100% of the shares.
OP needs to know their scheme rules.0 -
Expect to be shocked to eventually lose 50% or more of this RSU grant to tax and NI, and expect to be both puzzled and aghast at the eye-watering tax withholding that gets applied when RSUs vest.
I'll contrive not to be present when the young man reads your reply.martinsurrey wrote: »While this can be true, its not necessarily true, my employer doesn't claw back NI and offers the option to self fund the tax so you can keep 100% of the shares.
OP needs to know their scheme rules.
Or rather my young kinsman does. I'll suggest he doesn't spend time on a careful reading until he knows he'll be there in three year's time.Free the dunston one next time too.0
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