Share Options Tax UK: What Tech Employees Need to Know

Share options and RSUs can be worth far more than your salary at a fast growing tech company. How they are taxed in the UK depends on timing, location and the type of award you hold.

Share Options Tax UK: What Tech Employees Need to Know

If you work for a fast growing tech company, your salary may be the smallest part of your pay. Share options and RSUs often carry the real value. Understanding share options tax in the UK helps you keep more of that value.

In episode 28 of the Tax Compass Podcast, Simon Roue and Laura Sant from LSR Partners explored how equity awards are taxed. They followed the journey from startup to IPO. Here is what they covered.

A proposed relief for founders

The Budget announced a proposed founders’ relief. It would offer a lower rate of capital gains tax to qualifying founders of high growth companies.

The conditions look demanding. They include UK residence, growth targets and a history of research and development claims. The rules are still under consultation. The final shape may change before anything becomes law.

UK approved schemes and US parent company plans

UK startups often use HMRC approved schemes. These include Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP). Within set limits, these schemes can move gains into capital gains tax rather than income tax.

Many tech employees in the UK work for a US parent company. Their awards usually sit in the parent company’s shares. Those plans are rarely HMRC approved. Income tax and National Insurance can then apply when awards vest or options are exercised.

Your salary is not your real income

Most people describe their pay by their salary. Laura often asks a different question. What does your P60 say?

When RSUs vest, their value counts as employment income. Your employer usually sells some shares to cover the tax. The rest land in your brokerage account.

It is easy to think nothing has happened. In fact, your taxable earnings may now be several times your salary. That affects your tax band, your allowances and your Self Assessment return.

RSUs and share options are taxed differently

RSUs are taxed when they vest. This applies whether or not you sell the shares. As a rough guide, if 100 shares vest, around 45 may be sold to cover tax. You receive the rest.

Options work differently. Once vested, they belong to you. Nothing is taxed until you exercise them. Income tax then applies to the gap between the market value and the price you pay.

Before an IPO, there is often no market for the shares. Many people simply wait. Then the company lists and the share price climbs. Exercising at that point can create a very large income tax charge.

The £1 million question of early exercise

Simon recently ran the numbers for one client. The client exercised a large number of options after the IPO. Had they exercised eight years earlier and held the shares, they would have saved over £1 million.

The reason is timing. Exercising while the shares are unlisted fixes the income tax at a lower value. Later growth then falls under capital gains tax instead.

Early exercise is not right for everyone. You pay to exercise, and you may owe tax upfront. Valuing unlisted shares can be complex. The shares could also fall in value. For someone committed to the company, though, it is worth exploring before an IPO arrives.

Moving abroad does not reset the clock

Some people exercise options after moving to a low tax country such as the UAE. They expect no UK tax.

The starting point is different. If the options vested while you lived and worked in the UK, that income generally stays taxable here.

Apportionment can reduce the UK share. Under the OECD approach, residents of a treaty country may only face UK tax on UK workdays. Days worked abroad during the vesting period can count, even while you were UK resident.

The UK/US double tax treaty has its own approach. In certain conditions, apportionment runs from grant to exercise rather than grant to vest.

Why payroll cannot always get it right

PAYE works well for straightforward pay. It applies a tax code and deducts tax. It cannot handle complex apportionment across several countries.

National Insurance also follows different apportionment rules from income tax. Your payslip may therefore not match what you actually owe. A correct Self Assessment return, or an overpayment relief claim, can put this right.