RSUs Vesting (soon) - How to be most tax efficient?

sho_me_da_money

Hi Fellow MSE Members,

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.


Thank you for your help and support

Daniel54

I'm struggling a bit as your figures jump between annual and monthly.I would suggest best to think annual in these circumstances, but apologies if I haven't fully understood your annual post sacrifice taxable salary.

Looks like your taxable salary is in the region of £49k.In my case I can choose discounted medical and dental plans offered by my employer  by monthly salary deduction, but these benefits are not tax deductible.

You are correct that RSUs are taxed as income on vesting, but you would need to check with the scheme and/or HR whether you can sacrifice or not.In my scheme there was no option to sacrifice RSU proceeds ( they were paid net of tax or  gross with the recipient paying the tax at the time of vesting). I was sacrificing salary into my pension.

Income tax is due on RSUs as at the date of vesting,so you would need to sacrifice the entire amount in November.

In your case sacrifice may not make a huge amount of difference. If you take the RSUs tax paid  and then put the proceeds into your pension, then you will be credited into your pension with 40% for everything above the upper earnings limits  as long as you do so within this tax year.

So if your aim is to avoid tax then putting the proceeds into your pension is the way to go, but sacrificing might make only a small difference ,mainly the 2% NICs above the upper earnings limit.

You might also consider whether you wish to retain some of the vested shares with a view to future growth, which is your call. 

sho_me_da_money

Thanks for the response Daniel.

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?

EdSwippet

sho_me_da_money said:

...
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).

I think you're creating problems for yourself by trying to think both monthly and annually at the same time. It's best to work the annual amounts out first, then see what effect those have on the remaining months.

Simplistically (and on your numbers, ignoring fiddly things like NI and any salary sacrifice NI uplift from your employer), at the end of the year you will have earned £61800 + £23000 = £84800. 40% tax starts at £50270, so you need to reduce your income by £33730. Okay so far.

Now, your current salary sacrifice is £1040, per month presumably. So from April to October inclusive you will have reduced your salary by £7280. Subtract from £33730 leaves £26450 more to shave. To accomplish this from November to March inclusive you would need to salary sacrifice £5290 per month.

That level of salary sacrifice might be hard to reach on a £61800 salary. If impractical, or if desirable, you can simply make other non-employer (SIPP, say) or non-sacrifice pension contributions to reach your goal. Or, you could increase your salary sacrifice before the vesting occurs, so that you sacrifice a bit less but over more months to get the same final amount.

Caveats. The above simple example does not take any account of NI. Also, it omits any other income you might have. Investment income (interest, dividends, and so on) could take your annual income above your stated £61800 salary. So you need to take a holistic view on this, and factor in your entire annual income to get the right figures.

sho_me_da_money

Thanks for this. Here are some accurate figures:

Annual Salary - £61800

Salary Sacrifice started in May and these are the figures sacrificed. I have adjusted my SS to a new amount £2040 recently (a few days ago)

May 2021 - £515
June 2021 - £515
July 2021- £1030
August 2021- £1030
September 2021- Should be £1550 or £2040 (i changed the amount from £1030 to  £1550 to £2040 so not sure which will take effect. It definitely won't be £1030)
October 2021- £2040
November 2021 - £2040
December 2021 - £2040
January 2022 - £2040
February 2022 - £2040
March 2022 - £2040
April 2022 - £2040

In May 2021, I had 11 RSUs vest over two tranches (7 + 4). The share price was around $3200 each at the time of vesting. This was the breakdown of each tranche:

SUMMARY - Tranche One (7 RSU)

Day - May 21 2021
Total Released - 7
Shares Sold - 4 (this was automatic as I have my settings set to 'Sell to cover taxes'
Shares held - 3 (I still got these in the account)

VALUE OF SHARES SOLD - 7 Units

Local 1 tax (43.895%) - $9870.11
GB Er NIC Tax (6.9%) - $1551.52
Refund (6.3476%) - $1427.30 (this gets sent to my bank account in addition to the monthly wage. It goes into the account on a different date to my monthly pay date)
Supplement Transaction Fee - $0.07
Total Value - $12,849.00

SUMMARY - Tranche Two (4 RSU)

Day - May 21 2021
Total Released - 4
Shares Sold - 3 (this was automatic as I have my settings set to 'Sell to cover taxes'
Shares held - 1 (I still got this in the account)

VALUE OF SHARES SOLD - 4 Units

Local 1 tax (43.895%) - $5640.07
GB Er NIC Tax (6.9%) - $886.58
Refund (24.1272%) - $3100 (this gets sent to my bank account in addition to the monthly wage. It goes into the account on a different date to my monthly pay date)
Commission - $9.95
Supplement Transaction Fee - $0.05
Total Value - $9636.75

I have a further 9 shares vesting in November 2021. The share price will be around $3500 each.

Questions

1. Based on the above, how much tax will I be paying in my November Vest?
2. I have £9100 left to pump into my ISA allowance this year. Should I sell the 4 stock units I already have (total value is around £10100) and rebuy the ticker in my ISA?
3. Instead of (2) leave the 4 units and any future vests as-is. The problem is that I know when I come to sell them I need to pay CGT but not sure what percentage this is - 10% or 20%?
4. What is the best strategy to help avoid paying the most amount of tax here?

Thank you again for taking the time to read and respond as and when you can

EdSwippet

sho_me_da_money said:

1. Based on the above, how much tax will I be paying in my November Vest?
2. I have £9100 left to pump into my ISA allowance this year. Should I sell the 4 stock units I already have (total value is around £10100) and rebuy the ticker in my ISA?
3. Instead of (2) leave the 4 units and any future vests as-is. The problem is that I know when I come to sell them I need to pay CGT but not sure what percentage this is - 10% or 20%?
4. What is the best strategy to help avoid paying the most amount of tax here?

Partial answers

1. Your tax withholding and your actual tax liability can be different. The withholding is based on PAYE and what your company knows about your finances. The liability is what drops out of combining that with other investment income, dividends, interest, and so on on the end-of-year self assessment.

I suspect what you want to know here is the latter number, which isn't calculable without a full picture of your finances. For the first number, you employer's payroll department should be able to tell you.

2. Stocks are always better held in an ISA to the maximum extent possible. Be aware though that if you sell outside the ISA and repurchase inside the sale may create a capital gain. If that falls inside the annual CGT allowance then it won't be taxable. Otherwise, it will be.

3. Capital gains tax is 0% up to £12300 of gains, then 10% lower rate tax and 20% higher rate tax. From a glance at your numbers, it looks like you'd be in the higher rate.

4. When it comes to mitigating tax on earnings, pension contributions are the best and simplest. Note however that you can only put earnings into a pension, not capital gains (of course, since money is fungible you can always live off the gains rather than the salary, so this is only a problem when you no longer have salary). There's little you can easily do beyond that. VCTs can be an option, but they're a bit specialist.