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clientservices@lsrpartners.comIf you receive equity awards from your employer; RSUs, share options, or anything in between, understanding how they are taxed in the UK is not optional. Get it wrong and you could be overpaying tax, underpaying tax, or find yourself in a very difficult conversation with HMRC.
Your employer granted you equity awards a few years ago. The company has done well, and those awards are finally worth something. Before you decide what to do with the money, answer one question first: are you paying the right amount of UK tax on them?
Many people get caught out in this area. Not because they are trying to avoid anything, but because employment related equity is genuinely complicated. At LSR Partners, we help clients untangle situations where equity has been over-taxed or under-taxed, sometimes going back several years. Most company payrolls do not always get this right.
Here is what you need to understand.
Restricted Stock Units, known as RSUs, are not investments in HMRC's view. When they vest and you receive the shares, HMRC classes them as employment income. That puts them in the same category as your salary or bonus. You pay income tax and National Insurance on the market value of the shares on the vesting date.
Many people find this surprising. You receive shares rather than cash, so you might expect HMRC to treat them as a capital item. HMRC does not see it that way. You received the shares through your employment. That makes them remuneration, and remuneration is income.
For employees at large companies, payroll handles this through a sell to cover process. Your employer sells a portion of the vested shares to cover the income tax and National Insurance due. The shares that land in your brokerage account are already net of tax.
Once you hold the shares, the picture changes. Any gain you make after that point falls under capital gains tax, not income tax. Your base cost for capital gains purposes is the market value on the vesting date. That is the same figure your employer used to calculate the income tax.
Share options have a different tax treatment, and that difference matters.
With an RSU, the vesting date is the tax point. The shares become yours, they have a value, and HMRC taxes them as income at that moment.
With options, you have the right to buy shares at a set price at some future date. The options vest, but vesting does not trigger a tax charge on its own. Tax only arises when you exercise the option. That is when you pay the exercise price and receive the underlying shares.
HMRC takes this approach because you cannot convert an option to cash. Until you exercise it, you cannot sell it. You have not received anything of real value yet. Taxing you before you can raise the money to pay would be unreasonable.
The earnings period and the tax point can sit years apart. Your vesting period might run from 2021 to 2024. If you hold the options and exercise them in 2027, that is when you pay the tax. The award still counts as income. The vesting period still determines how much falls within the scope of UK tax. The actual payment, however, happens much later.
For anyone who spent time outside the UK during the vesting period, this creates both complexity and, in some cases, genuine planning opportunities.
This is where the stakes rise and where professional advice makes a real difference.
HMRC looks at where you were tax resident across the entire vesting period and taxes only the UK-resident portion. Take a four-year RSU grant where you spent the first two years in the US and the final two years in the UK. HMRC's starting position is that 50 per cent falls within the scope of UK income tax. The remaining 50 per cent was earned while you were non-resident and sits outside UK tax.
That sounds straightforward. In practice, it rarely is.
When you move countries, your company should adjust its payroll to reflect your new residence. In reality, there is often a lag. A three-month secondment turns into something longer and payroll never catches up. Your employer moves you onto the overseas payroll on a date that does not match when you actually broke UK tax residence. The figure reported to HMRC ends up wrong.
HMRC's default time apportionment approach is not the only way to calculate the UK portion. Other methods exist. Treaty considerations and OECD guidance can sometimes produce a more favourable outcome, particularly for options. We have argued for different apportionment calculations based on specific client circumstances and achieved meaningfully lower UK tax bills as a result.
Working for a US company with equity in dollars adds another layer. Foreign exchange calculations affect both the income tax charge at vesting and any capital gains on later disposals. Getting the FX figures wrong is easy, and the consequences are real.
Do not assume that because your employer runs payroll, your equity tax position is correct. Payroll departments make mistakes in this area, even at large companies. Some apportion based on when you moved onto the local payroll rather than when you actually became UK tax resident. Some miss overseas workdays. Others apply UK tax to the full award when part of it was earned during a period of non-residence.
Overpayments happen. Some clients have overpaid by tens of thousands of pounds. Underpayments happen too. Finding either one early and correcting it proactively is far better than waiting for HMRC to raise it with penalties attached.
Anyone with equity awards who has moved countries at any point in their career should treat their tax position as worth checking.
This is not financial advice, but it deserves a mention. Simon often tells the story of a former colleague whose brother worked at Lehman Brothers for 25 years and never sold a single share. His entire retirement fund sat in Lehman stock. When the firm collapsed in 2008, he lost everything and had to work for another decade.
Each time your shares vest, you face a decision. Hold on or diversify. Holding means making a concentrated bet on your employer. Your salary and career are already tied to the same company. For most people, selling at vest or shortly after is the rational move.
At LSR Partners, we are not financial advisers. We are not telling you what to do with your shares. We can make sure that whatever you decide, you pay the right tax on it.
Complexity creeps up on you with employment related equity. It starts simply: you get some shares, they vest, your employer handles the tax. Add an international move, a payroll gap, some unvested options and a mix of income tax and capital gains tax across several vesting dates, and the picture becomes complicated fast.
Anyone with equity awards and an international dimension to their tax affairs should speak to someone who understands both.
LSR Partners help you pay the right tax in the right place at the right time. Book a call with us at lsrpartners.com to discuss your situation.
This article is for general information purposes only and does not constitute tax advice. Your individual circumstances will affect the tax treatment of your equity awards. Please contact us to discuss your specific position.
You can listen to the full episode of the Tax Compass Podcast here.
