Key takeaways
- HMRC's own example prices a vest at 42%: 1,000 shares at £20 each is £20,000 of employment income, £8,400 withheld, and £11,600 of shares left over.
- National Insurance is worked out on the month the vest lands in. Above the £4,189 monthly upper earnings limit the rate on it is 2%, not 8%.
- On a £90,000 salary, a £20,000 vest costs £10,400, not £8,400, because of the £100,000 Personal Allowance taper. Withholding at 42% leaves £2,000 short.
- Your base cost is the vest price. A higher rate taxpayer pays 24% on gains after that, against 42% on the vest itself — a gap of 18 percentage points.
- The £3,000 annual exempt amount covers a 25.9% rise on the £11,600 of shares left after one vest of that size, before any Capital Gains Tax falls due.
An RSU is pay, and the bill lands on the vest date whether you sell or not
You've had a vest notification, some shares have vanished to cover tax, and you want to know what actually happened.
Here's the short version. A restricted stock unit is a promise to hand you shares once conditions are met. HMRC's Employment Related Securities Manual calls it "an agreement to issue stock or shares at the time the award vests", and adds that "no shares are delivered until the employee satisfies the vesting schedule". Nothing is taxed at grant. On the vest date you're treated as receiving employment income equal to the market value of the shares, and Income Tax plus employee National Insurance fall due on that amount in that tax year.
From that moment you own ordinary shares in an ordinary brokerage account. Their cost for Capital Gains Tax is the same vest price you were just taxed on. Everything after that — sell today, sell in five years, never sell — is a separate decision about a shareholding you now own outright, taxed under a different regime at lower rates.
That single fact drives everything below.
HMRC's own example: £20,000 of shares, £8,400 withheld, £11,600 left
HMRC's guidance on net settlement reporting carries a worked example, which is useful because it is the tax authority's own arithmetic rather than a plan administrator's. The award is 1,000 shares. "The market value of the shares at exercise, or when otherwise acquired, is £20 per share." That's £20,000 of employment income.
Then the assumption that does all the work: "For the purpose of these examples, the effective rate of tax and employee National Insurance contributions for PAYE purposes is 42%." So "the Income Tax and National Insurance contributions liability is calculated as £20,000 × 42% = £8,400", and the employee "only receives net shares equivalent to £11,600". At £20 a share, that's 580 shares.
There are two mechanics for getting the £8,400 to HMRC, and they land you in the same place. Under sell to cover, HMRC describes "the employee selling some of the securities they beneficially acquire to yield sufficient cash to reimburse their employer". Under net settlement, "the employer uses its own cash to settle the Income Tax and employee's National Insurance contributions... The company then provides fewer securities to the employee". The paperwork differs. Your net position doesn't.
PAYE applies at all because listed shares are what the legislation calls a readily convertible asset — something you could turn into cash on a recognised exchange. HMRC's test is blunt: if the security is a readily convertible asset, "then PAYE is due".
Where 42% comes from, and why National Insurance is a monthly question
For the 2026 to 2027 tax year, the higher tax rate is "40% | From £37,701 to £125,140" of taxable income. Employee National Insurance runs at 8% between the primary threshold and the upper earnings limit, then drops to 2% above it. Add 40% and 2% and you have HMRC's 42%.
The 2% is the part people miss, and it is a monthly test, not an annual one. GOV.UK sets the upper earnings limit at "Over £967 a week (£4,189 a month)". National Insurance is charged on each pay period separately, so a vest stacks on top of that month's salary. On a £90,000 salary, monthly gross pay is around £7,500 — already clear of £4,189 — so the whole vest sits above the limit and attracts 2%.
Reverse it and the picture changes. If your regular pay is below £1,048 a month, the vest fills up the 8% band first. Someone whose vest lands inside the basic rate band and below the upper earnings limit faces 28%, not 42%. Someone above £125,140 faces the 45% additional rate plus 2%, so 47%. A Scottish taxpayer at the top rate of 48% is at 50%. The chart below plots those marginal rates alongside the Capital Gains Tax rates that apply after the vest.
One more line can move the number. Some plans transfer the employer's National Insurance to the employee by joint election. The employer's rate is 15%. HMRC's manual notes that where this happens the employee "can get a deduction equal to the amount of NICs transferred... when working out the amount chargeable to income tax", but that "a deduction is not allowed when working out the charge to NICs". If your plan documents mention a NICs election, your effective rate isn't 42%.
42% is a withholding assumption, not a calculation of what you owe
Now the gap. Take a £90,000 salary and HMRC's £20,000 vest. Combined, that's £110,000 of adjusted net income.
GOV.UK is explicit about what happens above £100,000: "Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000." Losing £1 of allowance that would otherwise be untaxed, while paying 40% on the pound that displaced it, produces an effective marginal rate of 60% on that band. Add National Insurance at 2% and the marginal cost is 62%.
Split the vest at the threshold. The first £10,000 sits below £100,000 and is taxed at 40%, which is £4,000. The second £10,000 sits inside the taper band at 60%, which is £6,000. Income Tax on the vest is £10,000. National Insurance at 2% adds £400. Total: £10,400, an effective rate of 52% on a vest that was withheld at 42%.
The shortfall is £2,000 — 10% of the vest, or 100 shares at the £20 vest price. Nobody has made a mistake. The withholding rate did what it was set to do. It just wasn't set to your marginal rate.
The same arithmetic runs in the other direction. A basic rate taxpayer withheld at 42% has overpaid, and gets it back through their tax code or a return. GOV.UK's guide to employee share schemes puts the reporting duty plainly: "You'll need to report Income Tax and National Insurance contributions by submitting a Self Assessment tax return if your employer does not deduct these through payroll." The under-withheld and the over-withheld reach HMRC by the same route.
If your employer couldn't deduct the full amount, the clock runs 90 days
There's a second gap, and it has a deadline attached. Sometimes an employer has to account for more PAYE than it can physically deduct from that month's net pay. The legislation puts the balance back on you.
HMRC's manual states it directly: section 222 of the Income Tax (Earnings and Pensions) Act 2003 "imposes a charge to income tax on the employee if the employee does not, within 90 days of the end of the tax year in which the chargeable event occurs, make good to the employer any PAYE tax that the employer was unable to deduct". The manual gives its own illustration: "if the event occurs on 28 February, the employee has until 4 July to make good the full amount of PAYE to the employer".
Two details make this sharper than it looks. The charge is on the unpaid tax itself, treated as further employment income — tax on tax. And missing the window is not curable by paying late: "if the employee makes good the relevant amount of income tax to the employer after the time allowed, the section 222 charge remains". HMRC also notes the charge survives an employer's own payroll error, because "a section 222 charge will arise if the employee does not make good the relevant amount of income tax to the employer within the time allowed", regardless of whether the employer operated PAYE correctly.
Whatever is left after withholding, you bought with post-tax money
Here's the part that isn't about tax at all. After the withholding, HMRC's employee holds £11,600 of shares. That is money already taxed. Keeping it in the stock is the same decision as taking £11,600 of salary and buying that company's shares with it.
Most people don't experience it that way, because the shares arrive rather than being purchased. But the arithmetic of the exposure is the same either way, and it compounds. Four annual vests of that size, held with the share price unchanged, is £46,400 in one company.
That sits alongside a salary from the same company. In the worked example the vest is 18.2% of the year's total pay, and the shares are a claim on the same balance sheet that funds the other 81.8%. The two exposures aren't independent: a bad enough year for the employer can reduce the share price and the job at once. That is a statement about correlation, not a prediction. The evidence on how much concentration in an employer's stock has historically cost, and the schedules people use to manage it, is the subject of our piece on concentration in employer stock, which is where that argument belongs rather than here.
After the vest it's Capital Gains Tax, and the rates are lower
The vest price becomes your base cost. HMRC's manual sets out the mechanism: amounts charged as employment income "can be added to the employee's acquisition cost of the shares for Capital Gains Tax purposes on the occasion of the first disposal of the shares after their acquisition", under section 119A of the Taxation of Chargeable Gains Act 1992. The point of the rule is to stop the same rise in value being taxed twice.
Practically, that means selling on the vest date produces roughly no gain, because sale price and base cost are the same figure. Hold, and only the movement after the vest is a chargeable gain. For 2026 to 2027, "if you're a higher or additional rate taxpayer, you'll pay 24% on your gains from 6 April 2026", and gains falling inside the basic rate band are charged at 18%.
Set 24% against the 42% the vest itself cost and the gap is 18 percentage points. The tax system charges you much less on the appreciation than on the grant. On top of that, the annual exempt amount for the 2026 to 2027 tax year is £3,000. Against the £11,600 left after one vest of HMRC's size, £3,000 covers a 25.9% rise before any Capital Gains Tax is due at all.
Two mechanical points catch people. If you sell some shares and a later tranche vests within 30 days, the share matching rules can pair your disposal with the newer shares rather than the older pool, which changes the gain — the sequencing is set out in our guide to the UK share matching rules. And shares held outside a tax shelter carry that Capital Gains Tax exposure indefinitely, which is a question of where the holding sits rather than whether you keep it; our guide to asset location across ISAs, pensions and taxable accounts works through the trade-offs. The full set of current rates and thresholds is collected in our UK investment tax rates and allowances table.
The strongest objection: a well-run payroll closes the gap by itself
The counter-argument to the under-withholding section deserves stating properly, because it is often right.
The 42% in HMRC's guidance is explicitly an illustration — "for the purpose of these examples" — not a statutory withholding rate. Where a UK employer runs the vest through its own payroll on your live cumulative tax code, PAYE recalculates your position from the start of the year each time you're paid. The taper effect can be picked up in-year, the extra tax deducted from subsequent salary, and no gap ever appears. Many employees in this situation owe nothing extra and file nothing.
The gap is real in narrower cases: where a tax code doesn't reflect income above £100,000, where the shares come from an overseas parent and withholding is set at a flat rate, where the vest is the event that first pushes you over a threshold, or where the employer simply couldn't deduct enough. Those cases are common enough to check, and the check costs one calculation. But "sell to cover always under-withholds" would be an overstatement, and this piece doesn't make it.
There's a second objection worth taking seriously, on the holding decision. Reading a retained vest as a fresh purchase is an analytical framing, not a legal fact, and it ignores real constraints. Senior employees are often subject to shareholding requirements. Dealing windows and insider rules restrict when disposals are even possible. And an employee may hold information about the business that a general argument about concentration cannot see.
What this arithmetic doesn't cover
The limitations here are worth being specific about, because tax arithmetic generalises badly.
Every rate above is the 2026 to 2027 tax year, for England, Wales and Northern Ireland, on National Insurance category letter A. Scottish taxpayers pay Scottish rates on employment income but the same UK-wide rates on capital gains, so the vest and the later gain diverge more sharply. The worked example assumes no pension contributions, no Gift Aid, no salary sacrifice and no other income — all of which change adjusted net income and therefore the taper.
It assumes an ordinary non-tax-advantaged plan. Share Incentive Plans, Save As You Earn schemes, Company Share Option Plans and Enterprise Management Incentives are taxed differently and are outside this piece. It assumes RSUs that settle in shares. HMRC treats a right to the cash equivalent as "a type of phantom share plan", which is a different animal.
It also assumes you were UK tax resident throughout the vesting period. Awards that vest across a period of international mobility are apportioned, and that calculation isn't attempted here. Finally, HMRC's £20 share price and 42% rate are illustrative figures in guidance, not market data. They anchor the arithmetic because they are HMRC's own; they aren't a claim about any real award.
What would change the numbers
A pension contribution. GOV.UK's definition of adjusted net income takes off "pension contributions paid gross (before tax relief)". Because the 60% band exists only between £100,000 and £125,140, contributions that pull adjusted net income back under £100,000 remove the taper from the calculation entirely. That is the single largest lever on the figure above, and it is a live decision in the same tax year as the vest.
A different withholding rate. If your plan withholds at 47% rather than 42%, the under-withholding case inverts and you're waiting on a refund instead. The direction of the gap is set by one comparison: the rate your plan applies against the rate the vest actually lands at.
A change in the Capital Gains Tax rate. The 18-point gap between 42% and 24% is what makes the base-cost rule matter. Narrow it and the distinction between selling at vest and holding becomes less about tax and more about concentration, which was always the more interesting half of the question.
The thing worth watching isn't the vest notification. It's your adjusted net income for the year, and where the vest pushes it. Everything else here follows from that one number.