Restricted stock units: how UK employees are taxed

Q: How does this look in practice?

Illustration only. Priya, a UK resident higher rate taxpayer whose salary is above the upper earnings limit, has 400 RSUs vest when the shares are worth £25 each. The taxable amount is £10,000. Through payroll she suffers income tax at 40% (£4,000) and employee National Insurance at 2% (£200), and her employer pays 15% employer National Insurance (£1,500). The plan sells 168 shares on the vesting date for £4,200 to fund her deductions. Those shares are matched with 168 of the vested shares, cost £4,200, so no gain arises. She keeps 232 shares with a base cost of £5,800 and sells them a year later for £6,960, giving a gain of £1,160, which is covered by the £3,000 annual exempt amount if she has no other gains in 2026 to 2027.

A UK employee is normally taxed on restricted stock units when they vest and the shares are delivered, not when the units are granted. The market value of the shares at that point, less anything paid, is employment income under section 476 ITEPA 2003, and where the shares are listed the employer must collect income tax and Class 1 National Insurance through payroll. The shares then have a capital gains base cost equal to the amount taxed, so only later growth is caught by CGT.

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What is an RSU for UK tax purposes?

HMRC’s Employment Related Securities Manual at ERSM20192 describes an RSU award as “normally an agreement to issue stock or shares at the time the award vests”. No shares exist for the employee until the vesting conditions are met, whether those are time, continued employment or performance targets. HMRC stresses that the facts of the award, not its label, decide the treatment.

Most RSUs give the employee a right to acquire shares, which is a “securities option” under section 420(8) ITEPA 2003, defined as “a right to acquire securities”. ERSM110015 confirms that RSUs and similar arrangements are securities options even though they are rarely formal legal options. From 6 April 2016 the acquisition of shares under any securities option is taxed under Chapter 5 of Part 7 ITEPA 2003 and not as ordinary earnings. If the plan can only ever pay cash, it is not a securities option at all but a form of phantom share scheme, taxed as cash earnings when paid.

For the wider framework, see employment related securities basics.

Is there any tax when RSUs are granted?

No. Section 475 ITEPA 2003 says no income tax arises on the acquisition of an employment related securities option. The grant is still a reportable event for the employer (see below), but the employee has nothing to declare.

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How much is taxed on vesting?

Section 476 charges the “taxable amount” when a chargeable event occurs. The main chargeable event is the acquisition of the shares under the option (section 477(3)(a)), and section 477(4) says shares are acquired when the employee obtains the beneficial interest, even if they are registered or transferred later. Under section 478 the taxable amount is the gain on that event less deductible amounts, which in practice means the market value of the shares at vesting less any price paid. For most RSUs nothing is paid, so the whole market value is taxed.

Dividend equivalents follow the same logic. In HMRC’s examples at ERSM20194, extra shares or cash paid at vesting to reflect dividends are added to the vesting charge, while cash dividend equivalents paid each year during vesting are taxed as earnings when paid.

How are PAYE and National Insurance collected?

Section 700 ITEPA 2003 treats the employer as paying PAYE income in the form of the shares on the date of the chargeable event, provided the shares are readily convertible assets. Under section 702 an asset is readily convertible if it can be sold on a recognised investment exchange or on the New York Stock Exchange, which the section names expressly, or if trading arrangements exist for it. Shares in a listed parent company will normally meet this test. HMRC’s step by step guide at ERSM170020 starts with that question: if the shares are readily convertible, PAYE is due.

Gains from employment related securities are earnings for Class 1 National Insurance under section 4(4)(a) of the Social Security Contributions and Benefits Act 1992, as explained at NIM06875, so employee and employer contributions are due on the same vesting value. Employer contributions can be shifted to the employee by agreement or joint election; see NI on share option gains.

Because the employee receives shares rather than cash, plans usually sell some of the vested shares (“sell to cover”) or ask the employee for funds. If the employee does not make good the tax to the employer within 90 days after the end of the tax year in which the vesting falls, section 222 treats the unpaid tax as further earnings, which is itself taxable.

What is the CGT base cost of the shares?

Section 119A TCGA 1992 adds any amount charged under section 476 to the cost of the shares, as if it had been paid for them. Section 144ZA stops the market value rule displacing the actual consideration on an option exercise, as HMRC explains at CG12398. For a nil cost RSU the base cost is therefore the amount taxed on vesting, which is the market value at that date. The detailed rules are covered in base cost of shares from employee share schemes.

Shares bought or received in a foreign currency are valued in sterling at the exchange rate on the date of acquisition, and sale proceeds at the rate on the date of disposal (CG78310). This can create a gain or loss in sterling even when the dollar price has not moved.

Matching rules decide which shares are sold. Section 105 TCGA 1992 matches a disposal with shares of the same class acquired on the same day, so sell to cover shares sold on the vesting date are usually matched with shares from that vest and show little or no gain. Section 106A then matches shares acquired in the following 30 days before the section 104 pool. See share matching rules.

What does the employer have to report?

RSUs are a non tax advantaged arrangement, so the UK employer must register them and file an “other” ERS annual return online by 6 July after the end of each tax year, including a nil return where nothing happened. HMRC’s guidance notes say RSUs are reported on the grants and options worksheets or on the acquisitions worksheet depending on whether they are structured as securities options. Values are entered in sterling.

How does this look in practice?

Illustration only. Priya, a UK resident higher rate taxpayer whose salary is above the upper earnings limit, has 400 RSUs vest when the shares are worth £25 each. The taxable amount is £10,000. Through payroll she suffers income tax at 40% (£4,000) and employee National Insurance at 2% (£200), and her employer pays 15% employer National Insurance (£1,500). The plan sells 168 shares on the vesting date for £4,200 to fund her deductions. Those shares are matched with 168 of the vested shares, cost £4,200, so no gain arises. She keeps 232 shares with a base cost of £5,800 and sells them a year later for £6,960, giving a gain of £1,160, which is covered by the £3,000 annual exempt amount if she has no other gains in 2026 to 2027.

What mistakes come up most often?

Declaring the vesting value again on the tax return as extra income when it has already been taxed through payroll.
Using the sale price, or zero, as the CGT base cost instead of the value taxed at vesting, which taxes the same value twice.
Ignoring the exchange rate on each date when working out the sterling gain.
Assuming that an overseas parent company handles everything; the UK employer has the PAYE and ERS reporting obligations.
Forgetting that time worked abroad during the vesting period can change the UK charge; see share awards for internationally mobile employees.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.