RSUs vs stock options: guide for UK employees

Started a new role, or weighing up job offers? As well as the offered salary, you might also want to compare what other benefits are on offer.

Some UK employers offer equity-based compensation as an incentive to join or stay with the company. These include restricted stock units (RSUs) and stock options. But which is better for UK employees?

We’ll take a closer look at both benefits here in this guide. Its stock options vs. RSUs, looking at the key differences between them to help you decide which is the best choice for you.

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Importance of understanding equity-based compensation

Equity-based compensation can have lots of benefits for employees, but it can also be complicated. You may be unfamiliar with the terminology, such as ‘vesting periods’, ‘strike prices’ and ‘exercising options’.

You’ll also have an employee compensation agreement or contract to get to grips with, as well as schedules for when benefits will be granted, vested and exercised.

It’s really important that you take the time to understand all of this properly. You need to have a sense of the value of your benefits, and your rights in exercising them.

What are stock options?

Stock options or share options are a type of employee share scheme (ESS). They give employees the right to buy shares in the company they work for at a future date.

The company sets a price that the shares can be bought for, and this doesn’t change even if the price of the shares increases later. It may also stipulate when the shares can be bought.

So the employee isn’t given the shares directly - only the right to buy them.

Stock options are designed to reward and incentivise employees, enabling them to own equity in the company and therefore a personal interest in how well it performs.

What are Restricted Stock Units?

Restricted Stock Units (RSUs) are another kind of equity-related employee compensation or benefit issued by a company.

A company may want to offer them as an incentive for new employees, helping them secure the best talent. Or they may grant RSUs to staff on different occasions, such as on an annual basis, to reward long service or when the company reaches a particular milestone or performance-related target.

The key thing to note is that RSUs don’t have monetary value at the time they’re granted. After a set period of time known as a ‘vesting period’, the RSU will convert to actual stock which can be sold for a cash value.

Differences between stock options and restricted stock units

Stock options and restricted stock units are both related to shares in the company you work for. However, they have quite a few differences, and it’s crucial to understand these.

We’ll run through each key difference below.

Difference #1 - Actual vs. optional shares

The main difference between RSUs and stock options is that one promises you shares directly, while the other simply gives you the option to buy the shares.

When granted, RSUs don’t directly give you the shares. But they do constitute a promise to transfer them at a later date, according to the schedule you’re given (or if certain conditions are met).

With stock options, you’re not given or promised any shares - only the option to buy them at a preset price at a later date.

Difference #2 - Share prices and value

Stock options give the employee the option to buy shares at a price set by the company at the time of granting. This doesn’t change even if the actual prices of the shares rise, although it also doesn’t change if the prices fall.

This could be a pro or a con depending on the company’s share prices at the time the options are exercised. But with stock options, employees can also time their purchase and sale of shares (within a given timeframe) to maximise returns.

With RSUs on the other hand, the outcome is more predictable and stable. Once vested, the shares are transferred to the employee at the current market price, and it’s then up to them when or if they decide to sell.

Difference #3 - Tax treatment

The way that equity-based compensation is taxed can be complicated, so it’s recommended to get professional advice to understand it properly.

Stock options are generally free from income tax and NICs when granted and exercised, if part of an HMRC-backed scheme. Capital gains tax may still be due when the shares are sold though.¹

RSUs tend to be taxed in a similar way to your salary. You’ll need to pay income tax and National Insurance (NI), and perhaps capital gains tax if you decide to hold onto your shares rather than sell them.²

RSUs vs stock options: which is better?

So, are RSUs better than stock options, or vice versa?

Ultimately, each equity-based compensation scheme is different, depending on the company and its policies. So you’ll need to weigh up each specific offer that’s on the table to see if it’s the right choice for you.

But here are a few key things to consider. RSUs tend to be seen as more flexible and low risk than stock options, as they grant you stocks directly within a certain time frame rather than simply giving you the ‘right to buy’. You’ll get to keep these shares even if you leave the company.

But RSUs do come with more taxes than stock options, as they’re treated by HMRC as ordinary income. Stock options could also lead to greater rewards, but only if the timing works out, the stock performs well and you have some stock market savvy.

Summary: RSUs and stock options

Here’s a quick at-a-glance table summarising all the key points you need to know about RSUs and stock options:³

	RSUs	Stock options
Value/prices of shares	Value depends on the current market price of shares	Value determined by the difference between preset purchase price and current market price
Risk level	Low risk, as shares are almost always worth something as long as the market value of stock is above zero.	Higher risk, as shares are worth nothing if market price is below the preset ‘strike’ price the shares must be bought for.
How shares are received	Transferred directly upon vesting, no purchase required	Purchase required following vesting period
Voting rights?	Yes, once vested	Yes, once exercised
Tax implications	Taxed as income once vested - income tax and NICs due. Capital gains tax due when sold.	No income tax or NICs due when granted or exercised, if part of HMRC-approved scheme. Capital gains tax due when sold.

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FAQs on RSUs vs stock options

Here are a few frequently asked questions on RSUs and stock options.

Why are RSUs taxed so high in the UK?

RSUs when vested are treated by HMRC as ordinary income, and therefore are taxed as such.

Should I sell RSUs or stock options first?

You’ll need to decide the most beneficial use of your equity-based compensation, depending on your circumstances and what benefits you have. It could be a good idea to speak to a specialist to help you make the most of your benefits.

What is the difference between RSU and NQ stock options?

RSUs are a promise of receiving stock directly from your employer following a vesting period.

NQs are Non Qualified Stock Options, which are a kind of non-HMRC-approved stock options scheme.

They give you the option to buy stock options at a preset price in the future, but you may not benefit from the favourable tax treatment in the same way as an HMRC-approved scheme such as an Enterprise Management Incentive (EMI) scheme.⁴

What is the difference between ISO and stock options?

An ISO is an Incentive Stock Options scheme, where employees have the option to buy shares in the company at a preset price in the future. It’s mainly used in the US, and is equivalent to an Enterprise Management Incentive (EMI) in the UK due to the favourable tax treatment it can offer.⁴

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Sources used:

1. Seed Legals - how RSUs are taxed
2. Frazer James - tax information on restricted stock units
3. J.P. Morgan Workplace Solutions - stock options vs Restricted Stock Units
4. Carta - info on ISOs and NQs

Sources last checked on date: 11-Oct-2024