What are restricted stock units (RSUs) and how do they work in the UK?

Just joined a new company, or weighing up job offers? One benefit you might need to know about as a UK employee are restricted stock units (RSUs).

Some companies offer their employees stock when they join the business, or as an annual bonus based on company performance. But what actually are RSUs and how do they work in the UK?

Find out everything you need to know here in this helpful guide. We’ll give you some examples of RSUs, run through the pros and cons and answer a few FAQs about them too.

And if you’re looking to help grow your income, check out Wise Interest. You can earn returns on GBP, USD and EUR by opening a Wise account and investing in a fund that holds government-guaranteed assets. Capital at risk.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in. Tax treatment depends on your individual circumstances and may be subject to future change. The content of this article is provided for informational purposes only and is not intended to be, nor does it constitute, any form of personal advice.

Investments in a currency other than GBP are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in GBP terms. You could lose money in GBP even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

What is a Restricted Stock Unit (RSU)?

Restricted Stock Units (RSUs) are a kind of 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.

Examples of RSUs

To give you an idea of how RSUs work, let’s run through a quick example.¹

Let’s say you join a technology company as a new employee. You’re given 100 RSUs, which have a vesting period of 4 years. But every year, 25% of the RSUs are vested and turned into stock - which means you don’t have to wait until the end of the 4 year period to receive any rewards.

You’ll get 25 shares in the first year, 25 in the second and so on. You might even receive new RSUs every year or at various other points during your career with the company. These will also vest and turn into stock at staggered intervals.

Pros and cons of RSUs

Here’s a quick look at the main advantages and drawbacks of RSUs as a form of employee compensation.

Pros:²

• Flexible and low risk - you can use RSUs as you see fit
• It may be possible to negotiate what you get as part of a job offer
• You own the stock even if you leave the company
• Your performance at work can have a direct impact on the value of your stock - which can be quite motivating!
• RSUs are generally considered to be better than stock options, as they grant shares directly rather than simply giving employees the ‘right to buy’.

Cons:²

• RSUs don’t have any value when you first receive them - they don’t pay dividends and you can’t sell them
• Tax may be due on RSUs when they are vested and turn into stock
• Different companies have their own policies and processes in relation to RSUs - so you might need to ask some questions and do some research.

How do Restricted Stock Units work in the UK?

RSUs are awarded to an employee on what is known as a grant date. This may be tied to an event such as joining a company, for each year the employee stays at the company, promotions or performance milestones.

The employee is usually given a distribution or vesting schedule, which sets out the timeline for when RSUs will be granted and vested.

On each vesting date, the predetermined number of RSUs will be converted to shares in the company. It’s then up to the employee whether they keep or sell their shares.

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How to manage your RSUs

As the recipient of RSUs, you might want to take steps to manage them - so that you get the best from your employee benefits.

The first step is to request your vesting/distribution schedule from your employer, along with any other details of the company’s RSU policy.

It’s also a good idea to seek financial advice, particularly in relation to your tax obligations when the RSUs are vested.

How vesting works

The term may be a little unfamiliar, but the vesting process is actually quite simple. It just means the process by which RSUs turn into stock, and the employee gains ownership of them.

Vesting may happen according to a schedule, or it may be tied to certain conditions or performance milestones.

How are RSUs taxed in the UK?

RSUs only create tax liability when they are vested, not when they’re granted.

When they become stock, they’re 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.¹

The exact amount of tax you’ll pay on RSUs depends on your circumstances, and how your employer has set up its RSU scheme.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in. Tax treatment depends on your individual circumstances and may be subject to future change. The content of this article is provided for informational purposes only and is not intended to be, nor does it constitute, any form of personal advice.

Investments in a currency other than GBP are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in GBP terms. You could lose money in GBP even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

FAQs on Restricted Stock Units

What is the difference between Restricted Stock Units and Stock Options?

RSUs grant the employee the stock directly, although a vesting period is common until the employee actually owns the stock.

Stock options simply give the employee the right to buy shares in the company, and usually at a specific price and before a certain date.

Are Restricted Stock Units taxed as income?

Yes, RSUs are taxed as income when they vest under UK tax laws.¹

Do RSUs count as income for UK mortgages?

It is possible for RSUs to be counted as income in order to secure a mortgage, but it’s not common in the UK. You might find that not a lot of lenders accept them.³

Do RSUs carry voting rights?

RSUs may carry voting rights once they are vested, but not before.⁴

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Sources used:

1. Frazer James - tech employee’s guide to restricted stock units
2. Indeed - example of an RSU
3. Cleerly - how restricted stock units work with mortgages
4. Investopedia - info on voting and RSUs

Sources last checked on date: 15-Oct-2024