How it's calculated
Share options are taxed at two moments: when you exercise them (buy the shares at the option price) and when you sell the shares. What is taxed at each moment depends on the type of option.
UK EMI options. If the exercise price is at least the market value when the option was granted, there is no income tax or National Insurance on exercise; you pay Capital Gains Tax when you sell.HM Revenue & Customs Business Asset Disposal Relief, at 18% from 6 April 2026, applies if the option was granted at least two years before the sale.HM Revenue & Customs
UK unapproved options. The spread at exercise is employment income, taxed at your marginal rate (ITEPA 2003 s.476), with National Insurance if the shares are readily convertible assets. The base cost for CGT includes the amount taxed as income, so only the later rise is a capital gain.HM Revenue & Customs CGT for 2026/27 is 18% within the unused basic-rate band and 24% above it, after the £3,000 annual exempt amount.HM Revenue & Customs
US non-qualified options (NSOs). At exercise, the difference between the fair market value and what you pay is ordinary income, so it is taxed like wages: federal income tax, Social Security up to the wage base, and Medicare.IRS
The formula
- Spread at exercise = options × (market value − exercise price)
- UK unapproved / US NSO, tax at exercise = income tax (and NIC or FICA) on salary + spread − the same on salary alone
- UK EMI, gain on sale = options × (sale price − exercise price); UK unapproved, gain on sale = options × (sale price − market value at exercise)
- CGT = (gain − £3,000) × 18% (BADR, or within the unused basic band) or 24%
- Net = sale proceeds − exercise cost − all tax
Worked example
Exercising 10,000 EMI options at £1 when the shares are worth £5, and selling them at £10 two or more years after grant, gives a £90,000 gain. After the annual exempt amount, CGT at the 18% BADR rate is £15,660, leaving £74,340.
| Line | Amount |
|---|---|
| Exercise cost (10,000 × £1.00) | -£10,000 |
| Spread at exercise | £40,000 |
| Income tax at exercise | £0 |
| National Insurance at exercise | £0 |
| Sale proceeds (£10.00 a share) | £100,000 |
| Capital Gains Tax (18% (Business Asset Disposal Relief)) | -£15,660 |
| Net after exercise cost and tax | £74,340 |
The same options as unapproved options cost £16,000 in income tax at exercise for someone on a £60,000 salary, plus £11,280 of CGT on the later rise.
Assumptions and limitations
- EMI options granted at market value and qualifying throughout; a disqualifying event changes the treatment.
- One exercise and sale in the same tax year, with salary as the only other income.
- US: federal tax and FICA only. State income tax, capital gains tax on the later sale, and incentive stock options (ISOs) with the alternative minimum tax are not calculated yet.
- Prices are per share in pounds for UK options and dollars for US options.