Share awards, explained from grant to tax return

For conventional share-settled RSUs, income tax generally arises when you acquire the shares – commonly at vesting or delivery – on their market value at that time, less anything you pay. There’s normally no tax when the RSUs are granted. The precise treatment depends on the terms of your award.

Some awards pay cash equal to the value of shares instead. These cash-settled or “phantom” arrangements aren’t shares or share options for tax purposes: the payment is generally taxed as employment income when it’s paid, and because no shares are acquired there’s no Capital Gains Tax.

Payroll and sell to cover. Where the shares are readily convertible assets – for example, shares that can be sold on a stock exchange – your employer accounts for PAYE and Class 1 National Insurance through payroll. Many plans sell some of the vested shares to fund the deductions (“sell to cover”); others deliver fewer shares and pay the tax in cash. Shares sold to cover are a disposal for Capital Gains Tax, normally matched with the shares you acquired that day.

The deductions are an estimate and don’t always settle your full liability for the year – for example, where your personal allowance is reduced. Any balance is usually dealt with through Self Assessment.

Some share plans also ask you to bear some or all of the employer’s National Insurance on the award – see “Can you be required to pay your employer’s National Insurance?” below.

These are options granted because of your employment that aren’t part of a tax-advantaged scheme. There’s normally no income tax when the option is granted.

When you exercise, income tax is charged on the market value of the shares less what you paid for them and for the option. If the shares are readily convertible assets, PAYE and Class 1 National Insurance apply through payroll. Selling or giving up the option for payment can also be taxable.

Your Capital Gains Tax base cost is normally what you paid plus the amount taxed as employment income.

Under some option plans you may also be asked to bear the employer’s National Insurance on the gain, through an agreement or a joint election.

Each scheme has its own legislation and conditions. EMI, CSOP and SAYE are share option schemes. SIP is different: you hold actual shares through a plan trust, and there’s nothing to exercise.

EMI options. Granted by smaller independent trading companies that meet the qualifying conditions. If the conditions are met and the exercise price is at least the market value at grant, there’s normally no income tax or National Insurance when you exercise. A discount at grant can be taxed on exercise, and changes to the company or your employment can affect the relief.

CSOP options. Options over shares in a qualifying company, up to a value limit per employee. If the conditions are met, there’s normally no income tax or National Insurance if you exercise between three and ten years after grant, or earlier in certain circumstances set out in the legislation. The Budget on 28 October 2026 announced changes to CSOP from April 2027, including a higher limit and a longer exercise period; these still need to be legislated, and we’ll confirm the rules that apply to your grant.

SAYE options. Linked to a three- or five-year savings contract. At the end you can use your savings to buy shares at a price fixed at the start. If the conditions are met, there’s no income tax or National Insurance on the difference between what you pay and what the shares are worth, and the interest or bonus is tax-free.

SIP shares. Free, partnership, matching and dividend shares held in a plan trust. Partnership shares are bought from your salary before tax. Shares kept in the plan for the required period – generally five years, or three for dividend shares – can come out free of income tax and National Insurance. Taking them out earlier can lead to a charge.

Capital Gains Tax may apply when you sell. Your base cost and any gain depend on the scheme and how you acquired the shares.

Some shares carry restrictions – for example, they may be forfeited if you leave, or can’t be sold for a period. Restrictions usually reduce the value taxed when you acquire the shares, but further income tax can arise later, when a restriction is lifted or varied, or when you sell.

Section 431 elections. You and your employer can jointly elect for the shares to be taxed on their value ignoring all restrictions (a full election) or only some of them (a partial election). The election must be made within 14 days of acquiring the shares and can’t be revoked.

An election isn’t automatically beneficial. It usually means more income tax and National Insurance at the outset in exchange for less later. If the shares fall in value or are forfeited, the extra tax already paid is generally not refunded. We recommend reviewing the implications before an election is signed.