Understanding how RSUs are taxed in the UK is essential if part of your remuneration comes in shares rather than cash. Restricted stock units (RSUs), unapproved share options and restricted shares can all create UK tax liabilities. However, the tax point and taxable amount can differ.
For senior employees and executives, problems often arise when awards vest, employers sell shares to cover payroll deductions or employees work in more than one country. You may owe UK tax even if you receive no cash. Paying Income Tax on an award also does not exempt a later share sale from Capital Gains Tax (CGT).
At a glance: how employee share awards are taxed
| Award or event | Typical tax treatment | Main issue to check |
|---|---|---|
| RSU grant | Usually no immediate charge for a conditional award | Actual rights and award terms |
| RSU vesting or settlement | Employment income commonly arises when shares are acquired | Tax point, market value, PAYE and NIC |
| Unapproved option exercise | Generally employment income on option gain | Exercise price, option cost, readily convertible assets |
| Restricted shares acquired | Potential employment income on acquisition | Actual market value, restrictions and elections |
| Restrictions lifted or varied | Possible further employment income charge | Chapter 2 ITEPA rules and prior elections |
| Later share sale | Potential CGT on the chargeable gain | Correct acquisition cost and share matching |
| Overseas employment | UK-taxable portion may require apportionment | Relevant period, duties, residence and treaty |
RSUs, Share Options and Restricted Shares: What's the Difference?
Employers can reward employees with RSUs, share options or restricted shares. These arrangements may look similar, but UK tax rules treat them differently.
The key questions are when you acquire the shares, whether you pay for them and whether restrictions apply. These details affect both the employment tax charge and any later capital gain.
RSUs: Shares Awarded When Conditions Are Met
Technology companies commonly use RSUs to reward and retain staff. An RSU usually gives you the right to receive shares after you meet conditions, such as remaining employed for a set period.
You do not normally pay for the shares. Their value generally counts as employment income when you acquire them. However, the award terms determine the precise tax point.
For example, 1,000 RSUs that settle when each share is worth £40 could create £40,000 of employment income. You may owe tax even if you keep the shares.
Share Options: The Right to Buy Shares at an Agreed Price
Share options give you the right to buy shares, usually at a price set when your employer grants the options. If the share price rises, you may buy shares for less than their market value.
With unapproved options, Income Tax generally arises when you exercise them. The calculation compares the shares’ market value with what you pay, including any qualifying option acquisition cost.
For example, exercising 1,000 options at £10 per share when each share is worth £50 produces a £40,000 employment gain, assuming no other adjustments.
However, tax-advantaged arrangements, including Enterprise Management Incentive (EMI) options, can have different tax consequences.
Restricted Shares: Shares with Conditions Attached
With restricted shares, you generally acquire the shares at the outset. However, conditions may limit their value or your ownership rights.
For example, you may be unable to sell the shares for a period. You might also have to forfeit them if you leave your employer.
Restrictions can reduce the taxable value on acquisition. Further Income Tax charges may arise when those restrictions end or change.
A section 431 election can change this outcome. A valid election may use the shares’ unrestricted market value at acquisition and prevent later charges under the restricted securities rules. The usual deadline is 14 days after acquisition.
How Share Awards Can Affect Your Tax Position
We examine the actual award documents rather than relying on the employer’s description. Two similar-looking awards may have different tax outcomes because the rights, restrictions or transaction dates differ.
When Do You Pay Tax on RSUs in the UK?
To understand how RSUs are taxed in the UK, first establish when you acquire the shares.
Most conventional RSUs create no immediate Income Tax charge at grant. Tax generally arises when you acquire the shares, often on vesting or settlement.
However, some plans defer delivery beyond vesting. You need to check the award terms to identify the correct taxable event.
If the shares are readily convertible assets, the employer generally operates PAYE and any applicable National Insurance contributions (NICs).
Listed shares commonly meet this test. An overseas parent company or foreign broker can complicate the position, so check how UK payroll handled the award.
Suppose 1,000 RSUs vest and settle when each share is worth £50. You pay nothing, so the example assumes £50,000 of taxable employment income.
Your employer may sell some shares to cover payroll deductions. For the calculation below, however, assume you retain all 1,000 shares until the later sale and fund any payroll liability separately.
Example: Receiving £50,000 of RSUs
| Description | Amount |
|---|---|
| Market value when shares acquired | £50,000 |
| Employment income subject to tax | £50,000 |
| Sale proceeds at £80 per share | £80,000 |
| Capital Gains Tax acquisition cost | £50,000 |
| Capital gain before allowances and adjustments | £30,000 |
This example ignores transaction costs, share matching and other adjustments. The £50,000 employment reward and the later £30,000 gain fall under different tax rules. The first generally attracts Income Tax and potentially NIC; the second may attract CGT.
Keep records of the original award and every share disposal.
What Happens When Your Employer Sells RSUs to Cover Tax?
Many employers use a sell-to-cover arrangement when RSUs vest. A share plan administrator sells some shares and uses the proceeds to fund payroll withholding.
This does not mean you pay tax only on the shares left in your account. The employment income calculation generally starts with the gross value of the shares acquired.
The sell-to-cover transaction also counts as a share disposal for CGT purposes. You therefore need to reconcile the payroll records with the broker’s statements.
Check the currency conversions too. A broker may show US-dollar values while UK payroll reports sterling. Different valuation times, exchange rates and transaction costs can affect the figures.
How Are Restricted Shares Taxed? Understanding Section 431 Elections
Restricted shares can create tax issues that do not apply to conventional RSUs. They are shares you acquire subject to conditions affecting their value or ownership rights.
For example, you may face a restriction on selling or a requirement to forfeit the shares if you leave. Such conditions can reduce the initial market value.
When restrictions end or change, further Income Tax charges may arise.
What Is a Section 431 Election?
A section 431 election is a joint election made by the employee and employer under the Income Tax (Earnings and Pensions) Act 2003.
A full election generally uses the unrestricted market value when you acquire the shares. This can increase the initial Income Tax charge but prevent later charges under the restricted securities rules.
You must generally make the election within 14 days of acquiring the shares. You cannot ordinarily add it retrospectively to a tax return after the deadline.
An election does not always produce a better outcome. Consider the share value, restrictions and your circumstances before deciding.
Example: How a Section 431 Election Can Affect Your Tax
| Description | Amount |
|---|---|
| Amount paid for the shares | £10,000 |
| Market value subject to restrictions | £12,000 |
| Unrestricted market value | £20,000 |
| Employment income without a full election | £2,000 |
| Employment income with a full election | £10,000 |
In this simplified example, a full election increases initial employment income from £2,000 to £10,000. However, it may prevent later charges when the restrictions fall away.
Without the election, the restricted securities rules may impose a further charge. The statutory calculation depends on the circumstances.
You cannot judge the best option from the initial figures alone. Consider future values, the restrictions and your tax position.
A section 431 election concerns restricted securities you actually acquire. It is not an automatic requirement for every RSU award.
Our Experience Advising Fintech Employees on Restricted Shares
At The Friendly Accountants, we've advised individuals working for major fintech businesses, including Monzo and Revolut, on the UK tax treatment of restricted securities.
In our experience, the terms of the share award are particularly important. Restrictions, acquisition dates, valuations and section 431 elections can all affect the amount and timing of any Income Tax liability.
We've also encountered situations where employees have subsequently left their employer, moved overseas or sold their shares. These circumstances can introduce further complications, particularly when reconciling the original employment income with the Capital Gains Tax position
The key is to examine the underlying documentation rather than assume that all awards described as RSUs or restricted shares receive the same tax treatment.
How Are Unapproved Employee Share Options Taxed?
Unlike RSUs, options give you the right to buy shares. The exercise price often reflects an amount agreed when the employer granted the options.
With unapproved options, Income Tax generally applies to the gain on exercise. The calculation takes account of the shares’ market value, exercise price and any qualifying cost of the options.
Suppose you exercise 2,000 unapproved options at £10 per share when each share is worth £35.
The £50,000 difference generally counts as employment income. This assumes you paid nothing to acquire the options and no other adjustment applies.
For CGT, the acquisition cost generally includes the £20,000 exercise price and £50,000 charged to Income Tax. If you immediately sell all the shares for £70,000, you may have little or no capital gain before costs and share-matching adjustments.
Tax-advantaged schemes such as EMI, CSOP, SAYE and SIP follow different rules. Confirm which scheme applies before calculating your tax.
Capital Gains Tax on RSUs and Employee Shares: Avoiding Common Mistakes
The cash you paid for employee shares is not always their full CGT acquisition cost. In many non-tax-advantaged arrangements, you can also include amounts already charged to Income Tax.
This helps prevent a second tax charge on the same amount. However, the precise cost depends on the award type and relevant legislation. Restricted securities can involve additional rules.
Why Your Broker's Share Values May Not Be Correct for UK Tax purposes
Employees often rely on the acquisition costs shown by overseas brokers. Those figures may not match the correct UK tax cost.
If you acquire shares through several RSU vesting events, you may need to apply the UK share identification rules:
Foreign exchange conversions can also change the calculation.
Whether you must report a disposal depends on your total gains, disposal proceeds and Self Assessment circumstances. PAYE deductions do not automatically settle your CGT reporting obligations.
How Are RSUs Taxed in the UK if You Move Overseas?
International moves make it harder to establish how RSUs are taxed in the UK. You might receive an award in London, move to Singapore before vesting and sell the shares years later.
Leaving the UK before vesting does not automatically remove the UK Income Tax charge. Part of the award may relate to duties you performed in the UK.
For relevant awards, the internationally mobile employee rules can apportion employment-related securities income across different duties and periods.
The relevant period is not always grant to vesting. It depends on the legal form of the award and the applicable rules.
Example: RSUs Vesting After an Employee Leaves the UK
Suppose you receive RSUs while working in the UK. Halfway through the period relevant to the award, you move overseas but continue with the same employer.
The shares vest after you become non-UK resident. Even so, the UK may tax the portion attributable to earlier UK employment duties.
A simple 50:50 split may be wrong. You need to examine:
What About Capital Gains Tax After Leaving the UK?
Consider CGT separately from the employment income charge. A non-UK resident will not ordinarily pay UK CGT on a disposal of ordinary shares that are not within the UK property rules.
Exceptions can apply, including temporary non-residence and certain interests in UK property-rich companies. Your new country of residence may also tax the sale.
If your award spans employment in more than one country, coordinated advice may help prevent double taxation.
What Happens to Your RSUs and Share Options When You Leave Your Job?
Leaving your job can change what happens to your RSUs and options, especially if some awards have not vested.
The scheme rules and your reason for leaving may mean you:
Leaving does not necessarily remove UK tax. An option exercise after termination can still create employment income, including after a move overseas.
Could Exercising Share Options Leave You With a Tax liability but No Cash?
This risk matters particularly with options in private companies. Shares may have increased in value, but you might not be able to sell them.
Exercising may require cash for both the purchase price and tax. Check the scheme rules, exercise deadline, valuation, sale restrictions and payment arrangements before you proceed.
Can Employees Be Required to Pay Employer National Insurance on Share Awards?
Some share arrangements allow employers to transfer their Class 1 NIC liability to employees through a valid agreement or election.
This liability is separate from your own NIC. It can materially reduce your net proceeds.
For example, you may have to fund employer NIC alongside PAYE and employee NIC when exercising unapproved options.
Qualifying payments towards employer NIC may attract Income Tax relief. Check the documentation and detailed rules rather than treating the payment as a broker fee.
Do You Need to Declare RSUs and Share Options on Your UK Tax Return?
You do not always need to enter employment income from RSUs or options separately on your Self Assessment return. Your employer may already have reported it correctly through PAYE.
However, you may need to report further amounts if:
A later share disposal can create a CGT reporting obligation even if your employer handled the employment tax correctly.
What Records Do You Need to Report RSUs and Share Options?
Keep your award agreements, vesting and settlement statements, option exercise notices, payslips and P60s.
You should also retain broker statements, employer share-plan reports, section 431 elections and foreign tax certificates.
If you worked overseas, keep records of your duties and working days in each country. These documents help establish what payroll has already taxed and what you still need to report.
Common RSU and Share Option Tax Mistakes to Avoid
Knowing how RSUs are taxed in the UK can help you avoid errors, particularly if you have overseas awards or several types of share remuneration.
When reviewing employee share arrangements, we look for these common mistakes:
Specialist Tax Advice for RSUs, Share Options and Restricted Shares
At The Friendly Accountants, we have found that the terms of an award matter more than its label. An RSU, option or restricted share can require a different tax calculation.
We start with the rights attached to the award. We check when you acquire the shares, what restrictions apply and how the employer values them.
We then compare the employment income charge with payroll records and the CGT acquisition cost. For international awards, we also consider where you performed your duties.
Award documents, payroll records and broker statements do not always agree. Reconciling them helps prevent omitted employment income and incorrect capital gains.
Unsure About the UK Tax on Your RSUs or Share Options?
Employee share awards can create unexpected Income Tax and CGT liabilities. This is particularly true if you hold shares through overseas brokers, face restrictions or have worked internationally.
The Friendly Accountants can review the UK tax treatment, check payroll deductions and calculate the CGT position when you sell.
If you're planning to exercise share options, have received restricted shares or need help reporting a share disposal or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].