Embarrassed 40 year old - no pension.

sho_me_da_money

MSE Family,

Sorry for resurrecting this thread but I just created a new one here about RSUs and Tax - https://forums.moneysavingexpert.com/discussion/6293173/rsus-vesting-soon-how-to-be-most-tax-efficient#latest

Its ultimately above saving tax and here is a copy and past:

I have a few RSUs vesting soon and I wanted to better prepare myself.

Salary Overview

Before I explain the vest, I wanted to share my salary details. My gross salary is £61800 but I am salary sacrificing around £1040 into my workplace pension. The pension sacrifice along with my medical and dental contributions result in me taking home a net amount of £3073 per month.

Upcoming Vest

I am receiving an award of RSUs at the end of November. The gross value would be £23000.

Questions

What would be the most tax efficient way to deal with this?

Do I adjust my salary sacrifice even further for the month of November? If so, what amount do I set that to?

Am I right in thinking that for the month of November I adjust and up my salary sacrifice from £1040 to £2900? This then equates to a gross sacrifice of £34800 per year. Meaning my gross annual salary on paper (for the month of November at least) would be considered £27,000 (£61800 minus £34800). When the RSUs vest at around £23,000, they would attract a 20% tax as my gross annual salary would be considered £50,000 (£27,000 + £23,000).

Not sure if I have that correct or not.

FYI, I can adjust my salary sacrifice amounts very flexibly. There are no restrictions to the amount of time I can change them. I cannot help but feel I can do something here to avoid paying tax by salary sacrificing more and having that tax go straight into my pension.

Given that its also talking about pensions, I thought I would give myself a wider shot of getting the answer by asking in this thread too.

Thank you for your help and support

jamesd

Restricted Stock Units normally have conditional to be met before they are able to be exercised as options. If they do have trigger conditions then they are options with no immediate tax effect. If they don't have conditions and you can sell immediately then they are a salary substitute and taxable as income so yes, you might then increase sacrifice to cover that.

Options can be conforming or non-conforming. The non-confirming with UK law types have the gross profit treated as pay when exercised, the confirming it's treated as a capital gain.

So first you need to find out exactly what it is that you're getting.

sho_me_da_money

jamesd said:

Restricted Stock Units normally have conditional to be met before they are able to be exercised as options. If they do have trigger conditions then they are options with no immediate tax effect. If they don't have conditions and you can sell immediately then they are a salary substitute and taxable as income so yes, you might then increase sacrifice to cover that.

Options can be conforming or non-conforming. The non-confirming with UK law types have the gross profit treated as pay when exercised, the confirming it's treated as a capital gain.

So first you need to find out exactly what it is that you're getting.

Hi James,

Thanks for the response. I have a few shares that have vested with my company in the past. On the exact day that they vest, the stock broker (Morgan Stanley) sells off X number of shares to cover the taxes immediately and the balance is given to me, which I can also withdraw immediately to my bank account.

I believe my RSU vests have no conditions and are a salary substitute. My US company grants me them on X date > after 2 years they vest on Y date.

I can set my Morgan Stanley account to pay and cover the taxes myself or elect to sell of stock at on the vest date to cover the taxes owed.

In the past if I have had 10 RSUs, they normally take a total of 50.28% tax, which has resulted in 6 shares being sold to cover taxes (5 units at full price and 1 unit at a partial price). The partial sell equates to part of that sale going to tax (presumably .28%) and the rest refunded to my bank account (presumably 99.72%). I then get 4 full shares at full value sat in my broker account, which I can sell off immediately.

I hope that helps and does that answer your question?

If so, to go back to the original question, what should I salary sacrifice to get the maximum tax gain before the next vest date? £2900? (currently £1040 but will be £1550 next month).

Dead_keen

Based on the 50.28% rate you mention, your extra taxable income on vesting of the RSUs will be £19,826 [£23,000 * (100% - 13.8%)]. 

The maximum sacrifice you make can't reduce your pay in that month below the national minimum wage.

Without knowing how many hours you work, I'd guess the NMW is roughly £1,550 per month.  You earn £5,150 per month gross.  So that suggest the maximum sacrfice if roughly £3,600 per month.  If you already do £1,040 per month then you can do roughly an extra £2,560 salary sacrifice per month.  If you do that for November 2021 to March 2022, that's roughly £12,800 for the rest of the tax year.

So if you wanted to, you could do a salary sacrifice in earlier months to get to the £19,826 and/or make your own contributions to the scheme.

 

sho_me_da_money

My gross salary is £61800. I salary sacrifice £1040 into my pension right now. My new gross salary based on that sacrifice is around £49K.

Whenever I have had RSUs vest in the past, I have the choice:

1. Pay the taxes with my own money and get the full amount of RSUs awarded
2. Get the broker to sell of a portion of the RSU award to cover the taxes owed.`

I usually elect for option 2.

So as an example - If I had 10 shares vesting, the broker would sell off 6 out of 10 stock units. The tax is previous vests has been around 50.28%. In fact all my vests show that I pay just over 50% in taxes at the time RSUs vest.

5 shares cover 50% of that tax
1 share covers the very small amount over 50%. The rest is refunded to my bank account.
4 shares are mine.

I am trying to work out how I can reduce paying 50.28% tax in my next vest cycle (November). If I increase my salary sacrifice from £1040.00 to £XXXX and bring my overall gross salary down to say £27K from £49K, then at the time of my next vest cycle, the £23K worth of shares I am awarded when added to new the new gross of £27K will equal £50K. This total is the below the 40% tax threshold.

Does that then mean the tax for RSUs would be lower that 50.28%?

I am of the belief that the 50.28% somehow includes me paying 40%. The 40% tax threshold is £50K. My current annual salary as mentioned above is £49K due to the amount I am salary sacrificing.

However, when I get £23K worth of RSUs in November, that then pushes the total to £72K (49K + 23K). Meaning I would be paying 40% tax on £22K right?

Dead_keen

sho_me_da_money said:

I am trying to work out how I can reduce paying 50.28% tax in my next vest cycle (November). If I increase my salary sacrifice from £1040.00 to £XXXX and bring my overall gross salary down to say £27K from £49K, then at the time of my next vest cycle, the £23K worth of shares I am awarded when added to new the new gross of £27K will equal £50K. This total is the below the 40% tax threshold.

Does that then mean the tax for RSUs would be lower that 50.28%?

If you could sacrifice this amount then yes, it would.

If you could, the rate would then be 20% + 12% + 13.8% x (100% - 20%).

But as per my earlier post, you can't sacrifice your salary for a month below the NMW.

For completeness, you cannot do an "RSU sacrifice" (give up RSU award for employer pension contribution) in a tax efficient way.  Note: this is based on how the plan rules and RSU agreements for listed companies are normally drafted. Your may (but is incredibly unlikely to be) different.

sho_me_da_money said:

However, when I get £23K worth of RSUs in November, that then pushes the total to £72K (49K + 23K). Meaning I would be paying 40% tax on £22K right?

At the end of the year, it is "roughly" yes (plus employees' and employer's NIC).

As PAYE works on a monthly basis, there would be more tax 40% tax in the month of vesting than you might expect when looking at things on a full tax year basis.

I say "roughly" yes as as per my earlier post you would not have £23,000 of taxable income but an extra £19,826 (this assumes that the 50.28% rate you mention is right).

howmuch4

Im no financial whizzkid, far from it but as a low middle earner for 40 years the one thing that I learned is that saving for a pension is a state of mind and not neccessarily a number counting excercise. Every hol you have, treat here and there, new car etc etc..is money that could be going into ur pension. And for my money its once the house is paid for when money that u saved begins to pay dividends.
Always join ur employers scheme and pay as much as you can monthly into a sipp..and forget about it....20 years down the line with prudent financial advice you'll be amazed. I certainly was.

sho_me_da_money

howmuch4 said:

Im no financial whizzkid, far from it but as a low middle earner for 40 years the one thing that I learned is that saving for a pension is a state of mind and not neccessarily a number counting excercise. Every hol you have, treat here and there, new car etc etc..is money that could be going into ur pension. And for my money its once the house is paid for when money that u saved begins to pay dividends.
Always join ur employers scheme and pay as much as you can monthly into a sipp..and forget about it....20 years down the line with prudent financial advice you'll be amazed. I certainly was.

Forgive me for my ignorance. Why would I want a SIPP if i have my workplace pension? What advantage do I have going into a SIPP versus staying in my employers pension via salary sacrifice?

Albermarle

sho_me_da_money said:

howmuch4 said:

Im no financial whizzkid, far from it but as a low middle earner for 40 years the one thing that I learned is that saving for a pension is a state of mind and not neccessarily a number counting excercise. Every hol you have, treat here and there, new car etc etc..is money that could be going into ur pension. And for my money its once the house is paid for when money that u saved begins to pay dividends.
Always join ur employers scheme and pay as much as you can monthly into a sipp..and forget about it....20 years down the line with prudent financial advice you'll be amazed. I certainly was.

Forgive me for my ignorance. Why would I want a SIPP if i have my workplace pension? What advantage do I have going into a SIPP versus staying in my employers pension via salary sacrifice?

If your employer operates a salary sacrifice system for pension contributions , then best to make all your contributions via that route . If your employer does not operate a salary sacrifice system, then it does not matter if you make separate contributions to another pension, as long as you contribute enough to the workplace pension to get the maximum employer contribution.
Some may prefer to do this as they feel the choice of investments is better, and/or the charges are cheaper for the non workplace pension .
There also seems to be a misconception amongst some people that Workplace pensions are inherently poor . Not sure why but maybe because they are linked to work/poor employer  and often with traditional pension providers, so the assumption is made that they  must be worse than a shiny new SIPP with a modern website and marketing.
In fact many workplace pensions are perfectly fit for purpose, are less complicated than running a SIPP , and are better suited for the average investor .

sho_me_da_money

Albermarle said:

sho_me_da_money said:

howmuch4 said:

Im no financial whizzkid, far from it but as a low middle earner for 40 years the one thing that I learned is that saving for a pension is a state of mind and not neccessarily a number counting excercise. Every hol you have, treat here and there, new car etc etc..is money that could be going into ur pension. And for my money its once the house is paid for when money that u saved begins to pay dividends.
Always join ur employers scheme and pay as much as you can monthly into a sipp..and forget about it....20 years down the line with prudent financial advice you'll be amazed. I certainly was.

Forgive me for my ignorance. Why would I want a SIPP if i have my workplace pension? What advantage do I have going into a SIPP versus staying in my employers pension via salary sacrifice?

If your employer operates a salary sacrifice system for pension contributions , then best to make all your contributions via that route . If your employer does not operate a salary sacrifice system, then it does not matter if you make separate contributions to another pension, as long as you contribute enough to the workplace pension to get the maximum employer contribution.
Some may prefer to do this as they feel the choice of investments is better, and/or the charges are cheaper for the non workplace pension .
There also seems to be a misconception amongst some people that Workplace pensions are inherently poor . Not sure why but maybe because they are linked to work/poor employer  and often with traditional pension providers, so the assumption is made that they  must be worse than a shiny new SIPP with a modern website and marketing.
In fact many workplace pensions are perfectly fit for purpose, are less complicated than running a SIPP , and are better suited for the average investor .

Love ya mate! 😍