Overview of taxation on UK non tax-favoured share options
TL;DR
UK tax treatment requires income tax at option exercise, creating 'dry tax bills' on illiquid shares.
Authoritative legal guide on UK tax treatment of unapproved stock options. Explains the 'dry tax bill' problem: income tax is due at exercise on the spread between exercise price and FMV, even when shares cannot be sold. Critical for understanding why UK employees face worse outcomes than US counterparts.
Key Findings from Wessing (2025)
- Income tax (up to 45%) due at exercise on spread
- National Insurance may also apply
- Tax due regardless of whether shares can be sold
- No alignment between tax event and liquidity event