US stocks / shares

StevenO

Morning everyone.

For a few years now I have had a US brokerage account (Merill Lynch).

I've been awarded shares in the company as part of an ongoing reward scheme over the past four to five years.

Each time my shares vest, I seem to have a crazy tax obligation of nearly 50% (currently 47%). Last week when I modeled the shares it showed 1/3 for tax purposes when vesting, today it shows 47%! These are not deposited through my salary if I exercise them, it is dealt with separately through my brokerage account and wire transferred to me if I sell them. If I don't chose to sell them in this tax year then why am I paying a hefty amount of tax? If I do, I still don't get why 47%. Add to that fees, possible loss in exchange rates and it's barely worth having.

Anyhow, I have some more vesting in two days, and I can either chose to pay taxes or have them withhold shares for tax purposes (standard stuff).

Seeing as the stock has been a little unstable in recent years, I normally chose to withhold shares for taxes then cash the others in when they are at a high for this particular company.

I can't get my head around why the 47% tax, I am a UK tax payer, a portion of my income is in the higher rate tax bracket of 40%, but absolutely no where near the upper bracket! Especially for a small amount of shares in USD.

I contacted Meryll Lynch, they advised it was the tax rate set by my company. I've raised a ticket with my company, that will fire around six different countries, eventually end up in India and then they will might answer me in about six weeks time.

I wondered if anyone had more of an insight into off-shore investments and taxes, I've been meaning to look into it for a while. Any help and or advice would be appreciated, as I've paid thousands (USD) in taxes over the years equivalent to approx 50% every year.



Thanks,


Steve

horace972897

You pay 47% tax because that's the rate your employer has told Merrill Lynch - This covers 40% Income tax plus both the employee and employers NIC's (you will have signed to agree to pay the employer part when you accepted the shares) - it's taxed like this as these shares are given to you rather than bought through a share save scheme and therefore are treated as income.

If you work for the same company as me (which i think you may) then this withheld tax is reported via your payroll to ensure that you pay the correct amount - i.e. if it's too much it goes back into your salary as tax relief.

StevenO

Ok thanks Jon.

I think what makes it so hard to swallow is you are awarded X and given Y which seems disproportionately different. $470 USD per £1000 is a bit hard to swallow.

I hadn't realized about the NI contribution, so it's treated as income the day they vest whether I exercise them or not. I am confused why the estimate of taxes last week showed 1/3rd.

Now you mention it, I do actually recall in January of this year I had a very large amount of tax shown on my payslip, then a credit of what had been already withheld by Merill Lynch, at that point however it still seemed to me that I had been overcharged for tax. When I filled out the form online through Inland Revenue, it came up that I may have been owed £1200 over the year. That said once you start poking the Inland Revenue you never know what they are going to say, so I decided to leave them alone!

It seems strange the way it works, so it's really just like being awarded a small bonus and then gambling with it a little on the company stock.

horace972897

Hi StevenO - I get what you mean however if they had given you £1000 in your wage and you are in the 40% band you would have had 420 taken in tax/NI

With regards to something you said in your reply - you mentioned "exercise". I assumed that you had been awarded RSU's which just vest on a day and are then yours to do with as you wish within the restrictions (the restrictions are on transfer only). If you were given options which need to be exercised then my advice may be wrong......

bowlhead99

Ignoring the nuances of share-based compensation for a moment and just looking at cash bonuses:

If they had £1000 to spend on your bonus. They need to spend money on paying employer's national insurance for every pound they give you. So they could only give you about £875-880 as gross pay and still be able to afford the total bill with their £1000.

After you've paid your 2% employees national insurance of £17-18 and your 40% tax of £350 you won't see much more than £500 net in your bank account.

I guess you should count yourself lucky you don't already earn £100-120k a year. If so, for every extra £1000 gross pay you get, you lose £500 of personal allowance, so you're paying your 40% tax on the £500 as well as tax and national insurance on the bonus itself... so you won't get much more than £300 in your hand for the employer's £1000 outlay.

From the employer perspective it gets pretty difficult to compensate employees when they are already earning good money - there can be a huge leakage to tax between you paying and the employee receiving it. The employee who is already receiving tens of thousands of pounds a year from you will just grumble "oh I guess it's really just like being awarded a small bonus".

Share based compensation can be useful because the core 'cost' is borne by the shareholders rather than out of the company's cashflow; the employer knows what it will cost up front and if they have a delayed or staged vesting period, it helps to keep the employee around a bit longer. Perhaps if they had compensated you in cash and not stock, they would not have been able to afford so much, and then after taxes you would be saying "it's really just like being awarded a very small bonus"

StevenO wrote: »

at that point however it still seemed to me that I had been overcharged for tax. When I filled out the form online through Inland Revenue, it came up that I may have been owed £1200 over the year. That said once you start poking the Inland Revenue you never know what they are going to say, so I decided to leave them alone!

Probably the worst thing you can do if you are concerned you have paid too much tax, is to run the numbers to calculate what HMRC owe you, find out it's £1k+, but then not claim it because "you never know what they are going to say".

If the money is yours, claim it. The very worst that can happen is that they look at what tax you paid, identify that you have paid the wrong amount of tax somewhere else, and get you to pay it. If they later found that out anyway, you would still have to pay it. If you're in a position where you feel you're constantly paying too much tax, it's unlikely you are paying too little tax. There are only so many things that you do which might cause you to pay taxes - the main ones are your job and any savings or investments earning interest or dividends outside an ISA. If you have looked at all those things and believe you are owed a chunk of money, you probably are.

StevenO

Thanks for the advice and informative replies

It says something when a person can get information from strangers on the internet better than their own company or financial organisations!

I see what you are saying Jon, it's just a numbers game, really it's just a way of giving a bonus rather than any meaningful 'investment'.

Yes they are RSU's, normally awarded an amount each year and vesting 1/3rd over three years.

Thanks for the additional information BowlHead, very insightful, I saw the 47% which they round up anyway on a share basis and so is really equal to 50% shares withheld for estimated taxes.

Don't get me wrong, it's still essentially 'free' money in the respect that I wouldn't have had it at all if they hadn't awarded it to me (it's not mandatory). Although on the flip side, I've worked hard and so have been given them. When you are told you have say 7k USD worth of shares awarded, then it's split over three years, then the price drops, then they take 50% away, then convert it from peanuts into Sterling it makes it seem a whole lot less.

At least I understand it now thanks to both of you. I've been taking the tax 'hit' for around four years now with these and each year I've been meaning to question it.

Re the Tax paid, I think I will gather copies of my P60's and when this year is over properly investigate tax paid. The inland revenue just scare me for some reason

horace972897

Just to scare you some more.....

When the company splits, the stock you hold on the record date will be entitled to a DIVIDEND of stock in the new company (so you'll hold your original shares and a load of shares in the new company).
In the UK this will be treated as a dividend even though at the point in time of the split the shares will have no net gain or loss in value.

If you're a 40% tax payer you'll pay 32.5% on the value of the new shares. Your small slice gets even smaller....

You can however (i must stress this is not financial advice) transfer them from Merrill Lynch to a UK broker (before the record date - this is important) and then if you have a spouse who's not in the 40% bracket you can gift them to him/her.