How are employee share options taxed when exercised?
Answered 11 March 2026
How Are Employee Share Options Taxed When Exercised?
What the law says
The core charge — Income Tax as employment income
Under s.476 ITEPA 2003, if a chargeable event occurs in relation to an employment-related securities option, the taxable amount counts as employment income of the employee for the tax year in which the chargeable event occurs.
What counts as a chargeable event (s.477 ITEPA 2003)
The three chargeable events are:
- The acquisition of securities pursuant to the exercise of the option (i.e., exercise);
- The assignment or release of the option for consideration;
- The receipt of a benefit in connection with the option.
How the taxable amount is calculated (ss.478–479 ITEPA 2003)
The taxable amount = AG − DA, where AG is the gain realised and DA is the total deductible amounts.
On exercise, the gain (AG) is calculated as:
MV − C
where MV is the market value of the securities at the time of acquisition, and C is the consideration paid for those securities.
Deductible amounts (s.480 ITEPA 2003) include:
- Any consideration given for the option itself;
- Expenses incurred in connection with the acquisition of securities;
- Any reduction in market value of securities as a consequence of the acquisition;
- Any amount already counting as employment income under an approved CSOP;
- Any amount that constituted earnings in respect of the acquisition.
NIC treatment
The gain calculated under s.479 ITEPA 2003 in respect of which an amount counts as employment income under s.476 is treated as earnings liable for Class 1 NICs.
PAYE obligations (s.700 ITEPA 2003)
The employer must operate PAYE where:
- The option was granted on or after 27 November 1996;
- The exercise gives rise to a tax liability; and
- The shares acquired are readily convertible assets.
Shares are readily convertible assets where trading arrangements exist (or are likely to come into existence) for the shares, or where the shares would not qualify for corporation tax relief.
Capital Gains Tax on subsequent disposal
The Income Tax charge on exercise is added to the acquisition cost of the shares for CGT purposes. Where an option is exercised after 9 April 2003, the CGT base cost is the total of: the amount paid for the option + the amount paid for the shares on exercise + any amount counting as income under s.476 ITEPA 2003.
Exemptions from the s.476 charge
Section 476 expressly does not apply to:
- SAYE option schemes — s.519 ITEPA 2003 disapplies the charge on exercise;
- CSOP schemes — s.524 ITEPA 2003 disapplies the charge on exercise (subject to time limits);
- EMI options — s.530 ITEPA 2003 disapplies the charge where the option is to acquire shares at market value.
HMRC guidance / practice
Unapproved (non-tax-advantaged) options
For options not in an HMRC-approved scheme, there is a potential tax charge under Part 7 Chapter 5 ITEPA 2003 when the option is exercised, assigned or released. A charge at grant can also arise, but only for "long options" capable of exercise more than ten years after grant.
The gain is treated as specific employment income (not general earnings), meaning reliefs such as the seafarers' earnings deduction are not available against it.
Approved/tax-advantaged schemes — when gains are taxable
| Scheme | When a gain on exercise IS taxable |
|---|---|
| CSOP | Exercised within 3 years of grant (except within 6 months of retirement/redundancy/injury/disability) or more than 10 years after grant |
| EMI | Option granted at below market value; or exercised more than 10 years after grant; or more than 40 days after a disqualifying event |
| SAYE | Gains taxable only if exercised within 3 years of grant and because the company was sold or taken over |
EMI — no Income Tax or NIC on exercise (within limits)
Under EMI, eligible employees in small trading companies will normally pay no Income Tax or NIC either at grant or, if exercised within 10 years of grant, at exercise.
Cashless exercise
Where an employee enters into a cashless exercise arrangement (selling sufficient shares to fund the exercise price and/or PAYE/NIC liabilities), HMRC will accept the open-market sale price per security as the market value for computing the option gain under s.477 ITEPA 2003.
International/cross-border situations
Where an employee has worked in more than one country, share option gains are time-apportioned on the basis of workdays in each country from the date of grant to the date of vesting (for options exercised from 6 April 2005 onwards), in line with OECD recommendations. HMRC will apply this apportionment for the domestic charge even without a formal treaty claim, where overseas workdays are in a double tax treaty territory.
Citation sources
Deductible amounts are provided for in section 480 ITEPA 2003 and are: any consideration given for the securities option; any expenses incurred in connection with the acquisition of securities; any reduction in the market value of the securities as a consequence of the acquisition of other transactions; any amount which counts as employment income under an approved Company Share Option Plan; any amount that constituted earnings in respect of the acquisition of the securities; the amount of any g
Part 7 Employment income: income and exemptions relating to securities Chapter 5 Securities options Tax charge on post-acquisition chargeable events Amount of charge 478 1 The taxable amount for the purposes of section 476 (charge on occurrence of chargeable event) is— AG - DA where— AG is the amount of any gain realised on the occurrence of the chargeable event, and DA is the total of any deductible amounts. 2 Section 479 explains what is the amount of any gain realised on the occurrence of a c
ns will be treated as employment income (and therefore subject to a charge to tax as income). Insofar as relevant that reads:- 476Charge on occurrence of chargeable event (1) If a chargeable event occurs in relation to an employment-related securities option, the taxable amount counts as employment income of the employee for the relevant tax year. (2) For this purpose— (a) “chargeable event” has the meaning given by section 477, (b) “the taxable amount” is the amount determined under section 478
For PAYE/NIC to apply in respect of a non tax relieved share option gain the shares must constitute Readily Convertible Assets (section 702 ITEPA). In simple terms this means that there must be trading arrangements in place (or that will come into place) for the shares acquired on exercise of the option or alternatively (from 10/07/2003) that the shares would not qualify for CT relief in accordance with Sections 1001-1038 CTA 2007 (see BIM44265). More detailed guidance on RCAs can be found at ER
Part 7 Employment income: income and exemptions relating to securities Chapter 5 Securities options Tax charge on post-acquisition chargeable events Amount of gain realised on occurrence of chargeable event 479 1 This section applies for the purposes of section 478 (amount of charge on occurrence of chargeable event). 2 The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 477(3)(a) (acquisition of securities) is (subject to subsection (4))
Where an employee is granted a right to acquire shares (an option) under an option plan that is not a scheme approved by HMRC, there will be a potential tax charge under Part 7 Chapter 5 ITEPA 2003 when the option is exercised, assigned or released. The legislation at Part 7 Chapter 5 ITEPA 2003 was amended by Schedule 22 FA 2003 with effect from 1 September 2003. The guidance below relates to share options exercised before 1 September 2003. For: securities options that are share options exercis
Part 7 Employment income: income and exemptions relating to securities Chapter 5 Securities options Tax charge on post-acquisition chargeable events Charge on occurrence of chargeable event 476 1 If a chargeable event occurs in relation to an employment-related securities option, the taxable amount counts as employment income of the employee for the relevant tax year. 2 For this purpose— a “ chargeable event ” has the meaning given by section 477, b “ the taxable amount ”is the amount determined
Seafarers’ earnings deduction is not available as a deduction to be set against gains made on the exercise of a share option. Such gains are taxable under the rules on Securities Options in Chapter 5 of Part 7 (section 471 onwards) ITEPA 2003. Seafarers’ earnings deduction is available only against ‘general earnings’ as defined in section 7(3) ITEPA. The gain on exercise of a share option does not fall within the definition of general earnings. Rather income chargeable under Part 7 of ITEPA is d
In those circumstances, provided the sale is in the open market, the market value per security of all the securities acquired on the exercise of the option may be accepted as equal to the sale price per security sold for the purposes of computing the option gain under ITEPA 03/S477. The same value will be used both for the securities acquired and immediately sold and for any securities retained.
ir salary or wages to acquire shares through share options. Gains from exercising options in this scheme are only taxable if the option was exercised within three years of receiving it and because the company the employee worked for was sold or taken over. The full amount of any payment received in return for transferring, cancelling, releasing or otherwise not exercising an option under this scheme is also included as income. Approved Company Share Option Plans (CSOP) Allow a company to gran
Under the Enterprise Management Incentives (EMI) certain small trading companies are able to grant share options to an eligible employee or employees who will normally have to pay no Income Tax or National Insurance contributions either when the EMI options are granted or, if exercised within 10 years of grant, when they are exercised. There is a limit on the value of shares over which unexercised EMI options may be held by an individual employee and an overall limit for the company. The statuto
If the option is exercised, the grant of the option and the issue or transfer of shares on exercise of the option are treated as forming a single transaction (see CG12313). The cost of the securities acquired by the employee on exercise of the option depends on the date of exercise. If the employee exercises the option after 9 April 2003 the cost of the securities is the total of the amount actually paid by the employee for the option (or its market value at the date of grant if granted before
The effect of a double taxation treaty was discussed at ERSM161310. If the UK is not the country of residence when a chargeable event happens, then the employee may be resident in a territory with which we have a double taxation treaty. If so, they will be able to make a claim that the UK restricts its liability to the amount derived from employment in the UK. This is commonly referred to as “time apportionment”. The most common situation where this arises is with share options. The Organisation
The amount of any gain calculated under section 479 of the Income Tax (Earnings and Pensions) Act 2003 in respect of which an amount counts as employment income under section 476 is treated as earnings liable for Class 1 NICs. The amount of earnings is usually the total amount of the gain realised less any deductible amounts. Section 476 provides for an income tax charge on an amount which counts as employment income on the occurrence of a chargeable event in relation to employment-related secur