How RSU Tax Actually Works (And Why Your Vesting Year Can Be Brutal)
RSUs vest as salary, not investment gains. That single fact catches out more UK employees than any other part of equity compensation.
By Firoz Khan|21 May 2026|Updated 20 September 2026|9 min read
If your employer has given you Restricted Stock Units, the moment they vest is treated by HMRC exactly like a bonus paid in cash, taxed as employment income through PAYE, not as a capital gain. That distinction matters enormously, because it means a large vesting event can push your entire year's income into higher tax bands, including the 60% trap above £100,000, before you've sold a single share or seen any real cash beyond what your employer withholds. Here's what actually happens on vesting day, what to do about the tax bill, and where people consistently get caught out.
RSUs are taxed as income on vesting, not gains
When RSUs vest, HMRC treats the market value of those shares on the vesting date as employment income, subject to income tax and National Insurance through PAYE, in exactly the same way as your salary. If 500 shares vest at £40 each, that's £20,000 added to your taxable income for the year, taxed at your marginal rate, whatever that happens to be once combined with your salary. There is no capital gains treatment at this stage. The gains-based tax only applies later, and only to any growth in value after vesting, not to the vesting event itself.
Sell to cover: how the tax bill gets paid
Because RSUs vest as shares rather than cash, your employer can't simply deduct income tax from your bank account. Most schemes use a mechanism called sell to cover, where a portion of the newly vested shares are automatically sold immediately to generate enough cash to pay the income tax and National Insurance due, and the remaining shares are deposited into your account. If your effective tax rate on that vesting is 47%, roughly 47% of the shares get sold immediately for tax, and you keep the rest. This happens automatically and you rarely get a say in the exact number sold.
How a big vesting year pushes you into the 60% trap
Because vested RSU value counts as income in the year it vests, a large single vesting event can tip your total income for that year well past £100,000, triggering the personal allowance taper and the effective 60% marginal rate on the portion between £100,000 and £125,140. Someone on a £90,000 salary who has £30,000 of RSUs vest in one tax year suddenly has £120,000 of income, most of it landing directly inside the taper band. This is one of the most common ways senior employees at tech and finance firms unexpectedly fall into the 60% band without any change to their base salary.
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Capital gains tax applies after vesting, not at vesting
Once RSUs have vested and been taxed as income, the shares you keep have a new cost basis equal to their market value on the vesting date. Any growth in value from that point onward, if you hold the shares and sell later at a higher price, is subject to capital gains tax rather than income tax, using the annual CGT exempt amount and the CGT rates rather than your marginal income tax rate. If shares vested at £40 and you sell later at £55, only the £15 per share gain is a capital gain. The £40 has already been taxed once, as income.
US-listed RSUs and withholding complications
Many UK employees hold RSUs in US-listed parent companies, and this introduces an extra layer of friction. US brokers sometimes apply US withholding tax on dividends or on vesting depending on the scheme structure, even though you're a UK tax resident being taxed under PAYE for the vesting itself. The UK-US tax treaty generally allows relief to avoid double taxation, but claiming it correctly requires accurate record keeping, and mismatches between what a US broker withholds and what HMRC expects can lead to confusing statements that don't obviously reconcile without checking both sides carefully.
The mistake that catches people every vesting cycle
Sell to cover is calculated using standard withholding assumptions, and it frequently undershoots your actual tax liability, particularly if a large vesting event pushes you into a higher band or the 60% taper that the automatic withholding calculation didn't anticipate. That shortfall becomes a bill you owe HMRC directly, often via self-assessment, sometimes a year or more after the shares vested. People who assume sell to cover has settled everything are routinely surprised by a further tax demand, and the fix is straightforward: treat every vesting event as a potential under-withholding and set aside extra cash rather than trusting the automatic sale to have covered it in full.
Not tracking cost basis is the second recurring error
Because CGT is only due on growth after vesting, you need an accurate record of the market value on each vesting date to calculate any future gain correctly. Employees who vest RSUs across several years without keeping a clean log of vesting dates, share counts and prices often end up either overpaying CGT by using an inflated cost basis assumption, or underreporting gains because they've lost track of what was already taxed as income. Your employer's platform will usually show this, but it's worth exporting and keeping your own record, because access to old employer portals disappears the moment you leave the company.
A reminder
The FCA risk warning still applies to higher-risk crypto content. Always assess how much risk you are willing to take before buying.
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