Bonus, RSU & Vesting Tax (UK): Sell-to-Cover vs Hold with Examples

Introduction

Employees receiving cash bonuses and equity (for example, RSUs – Restricted Stock Units) can see a big bump in income, but also their UK tax bill. The rules are not always intuitive, and misunderstanding how PAYE, National Insurance, and Capital Gains Tax (CGT) interact leads to nasty surprises.

This guide explains how:

Cash bonuses are taxed
RSUs are taxed at vesting
What sell-to-cover versus holding the shares means in practice

We also walk through worked examples and timing tips so you can plan ahead.
This article is for general information only, based on UK rules at the time of writing. Always confirm the latest thresholds with HMRC and get advice tailored to your situation.

How bonuses are taxed in the UK

Cash bonuses from UK employment are treated as normal salary. Your employer runs them through payroll under PAYE, deducting Income Tax and employee National Insurance contributions (NICs) in the same way as your monthly pay.

Practical consequences for a bonus

PAYE estimates annual income: PAYE looks at your year‑to‑date income and assumes your current level of pay (including the bonus) continues for the rest of the tax year.
Higher withholding in the bonus month: Because of that assumption, the system can apply a higher tax rate in the month the bonus is paid than your eventual, true effective yearly rate.
Employee NIC is due on the bonus: The bonus also attracts Class 1 employee NIC in the same way as salary.
Over‑ or under‑withholding is corrected later: If too much tax is withheld, it is usually smoothed out in later payslips via your tax code, or via Self Assessment or a tax‑code adjustment from HMRC.

Why bonuses are perceived to be highly taxed

Because PAYE estimates a full year of income based on a single high‑pay month, the system may temporarily treat you as if you were permanently earning at the “bonus‑inflated” level. That can push more of the bonus into higher tax bands for that month’s calculation, even though your actual tax for the year is calculated on your true full‑year income.

The eventual true tax position is based on your full‑year taxable income. Any over‑deduction is usually corrected through your tax code or a tax refund once HMRC has your final figures.

How RSUs Are Taxed at Vesting

Restricted Stock Units (RSUs) are generally not subject to UK tax when they are granted. Instead, tax normally arises when RSUs vest—i.e., when the restrictions fall away and you actually become entitled to the shares, with no realistic risk of forfeiture.

Tax at Vesting

On the vesting of RSUs in the UK:

Market value at vesting = employment income: The market value (“fair market value”) of the vested shares at the vest date is treated as employment income.
Income Tax and employee NIC are due: UK Income Tax and employee Class 1 NIC are due on that value, usually operated by your employer via PAYE. If there is no UK payroll, you may need to account for this via Self Assessment.
Employer’s NIC may also arise: Employers may have to pay employer NIC on the vesting. Some schemes pass that cost on to employees by reducing the number of shares delivered or increasing the sell‑to‑cover amount.
Impact on higher‑rate bands and personal allowance: Because this income is added on top of your salary and bonus, it can push you into a higher tax band. It also counts towards your adjusted net income, which can start to taper away your personal allowance once you are over the £100,000 threshold (check current HMRC guidance as thresholds can change).

Tax on Sale of the Shares

After the shares have vested and you hold them, any further gain on disposal (sale price minus value at vesting) is within the Capital Gains Tax (CGT) regime.
You compare your total gains for the tax year against the annual CGT allowance. Gains above the allowance are taxed at the CGT rate that applies to you in that year.
If you sell immediately at (or very close to) the vesting value—which is common in sell‑to‑cover set‑ups—there is usually minimal or no CGT because there is little or no gain. The main tax cost is still the Income Tax and NIC at vesting.

Sell-to-Cover vs Full Retain

Two common approaches are used in practice when RSUs vest:

Sell-to-Cover

Your employer (or plan administrator) sells enough of the vested shares to cover the Income Tax and NIC due at vesting, then delivers the remaining shares to you.

Pros:

Automatic: You do not have to fund the tax bill from your own cash—it is covered by selling part of the award.
Cash‑flow friendly: The tax is dealt with at the vesting event, which can simplify budgeting and removes the risk of forgetting to set cash aside.

Cons:

Fewer shares left: You end up owning fewer shares than the number that vested.
No choice over timing of that sale: The shares used to cover tax are sold at the vesting price (or very close to it), so you do not benefit from any potential short‑term upside on those shares.
Still concentrated risk: Even after sell‑to‑cover, you may still have a meaningful chunk of your wealth in a single company’s stock.

Hold (sometimes known as "net settle" or paying the tax yourself)

You keep all the vested shares and pay the Income Tax and NIC liability in cash (or through other means approved by the scheme). Some plans refer to this as a “cash payment” or “pay in” method.

Pros:

More shares retained: You hold the full number of vested shares.
Greater upside exposure: If the company’s share price performs well after vesting, you participate in that upside on all the shares.

Cons:

You must fund the tax bill in cash: You need enough liquid cash to pay the Income Tax and NIC at vesting. If timing coincides with other big expenses, this can be a real constraint.
Market risk: The share price can fall sharply after vesting. You still pay tax based on the higher vesting value, even if the shares later drop.
Concentration risk: Holding a large position in your employer’s stock increases your exposure to that one company and sector. That can be risky if anything goes wrong with the business.

Example: Bonus Taxation in 2025/26 Tax Year

Scenario:

Salary: £42,000
Bonus: £4,000 payout in December

Impacts:

The gross income for the year will be just under £46,000.
This remains within the lower limit of the basic rate band for income tax at 20% in the UK.
Depending on payroll processing, your bonus month may be taxed at a higher rate if payroll assumes that level continues for the rest of the tax year.
Your actual tax liability for the fiscal year is based on total income. Any over-withholding could qualify for a refund or adjustment via tax code.

Conclusion

A bonus is generally added to your aggregate income to determine annual earnings for tax. A large one-off payment may cause increased withholding, even if your overall marginal tax rate for the year is unchanged.

Example 2: RSU Vesting with Sell-to-Cover — 2025/26

Scenario:

Salary: £70,000
100 RSUs vest, each worth £40 at vesting → £4,000 subject to tax

At vesting:

Income tax at 40% on £4,000 = £1,600
Employee NIC at 2% = £80
Total liability: ~£1,680

Employer arranges a sale of shares worth £1,680 (42 shares @ £40)—you receive ~58 shares.

After vesting:

CGT cost basis is £40 per share for your 58 net shares.
If you sell later at £50 per share, your gain is £10 × 58 = £580, which may trigger CGT depending on annual exemption.

Caveats

Tax rates may change based on your full-year income, tax band, and NICs.
Employer NICs may be recovered from employees in some schemes.
Share price movements between vesting and sale affect CGT liability.

Timing Tips for Surprises

Watch the £100,000 "Personal Allowance taper" threshold.
This creates an effective marginal tax rate of ~60% on income between £100k and about £125,140. If your RSU or bonus takes you into that band, consider pension contributions, salary sacrifice, or timing strategies.
Scrutinise your tax code.
A large bonus or RSU vest may lead to a tax code revision impacting your take-home. Always check payslip and coding post-event.
Plan savings if you want to hold vested shares.
If you want to hold, you’ll need cash on hand to pay the Income Tax and NIC for all the shares vested.
Track CGT exemption and reliefs.
If holding shares post-vest, record vesting date, value, sale date, and sale price. Use your annual CGT allowance, and try to spread gains across tax years when practical.

Indebtedness in Employer Stock:
If your employer’s shares become a large portion of your net worth, your risk increases. Consider strategies for diversification.

Bonus vs. RSUs: Key Differences

Feature	Bonus	RSUs
When taxed	When paid	When vested
Tax type	Income tax + employee NIC	Income tax + employee NIC at vesting
Market risk	None (once paid)	Yes (shares may fall after vesting)
Flexibility	Generally paid in cash	Limited by vest schedule and scheme
CGT Applies?	No (taxed as income only)	Yes — on any gain above vesting price

Frequently Asked Questions

Do RSUs affect my student loan repayments?

Yes. The income at vesting is treated as employment income, so it may increase your "relevant income" for student loan repayments, depending on your plan type.

Are RSUs taxed again when I sell the shares?

When you sell, you’re not taxed again as income. However, any gain above the market value at vesting may be subject to Capital Gains Tax (after applying your CGT exemption).

Does sell-to-cover trigger CGT?

Typically not. The sell-to-cover sale is usually at (or near) vesting value, so little or no capital gain arises. If the scheme is structured differently, check your tax treatment, especially for extra gains above the vest value.

Conclusion

Bonuses and RSUs can be rewarding but can also bring unexpected tax implications if unplanned. Whether you sell shares to cover tax or hold them, understanding how PAYE, NICs, personal allowance tapering, and CGT interact is key.

A helpful starting point: try an online salary calculator for a full breakdown. For tailored help, speak to a qualified tax adviser.