Sharesave and the Share Incentive Plan are UK tax-advantaged schemes, and the advantages stop at the UK border. HMRC normally charges no income tax or National Insurance when a Sharesave option is exercised, or on SIP shares kept in the plan for long enough. The IRS does not recognise either status, so a US citizen usually reports compensation, interest and dividends that the UK leaves untaxed.
This post is for US citizens and green card holders employed by UK companies that offer Save As You Earn or a SIP, often listed groups that run them for all staff. It goes further than the share plan table in our guide to US-UK tax for founders, fund managers and executives. It covers the UK reliefs, the US charge on each type of award, the SIP trust, sourcing and the foreign tax credit.
Does the US recognise Sharesave and SIP tax relief
Generally not. US law gives special treatment only to incentive stock options and options under a qualifying employee stock purchase plan, both defined by the US tax code. A Sharesave option or a SIP award meets UK conditions, not US ones, so it is usually taxed under the ordinary US rules for compensation.
IRS Publication 525 divides stock options into statutory options, which are incentive stock options and options under an employee stock purchase plan, and nonstatutory options, which is everything else. A Sharesave option is unlikely to meet the US conditions for either, because the plan is drafted around HMRC's rules. Shares delivered outright, as in a SIP, fall within the US rules on property received for services.
The treaty does not change this for a citizen. The saving clause lets the US tax its citizens as if the treaty did not exist, apart from listed exceptions, and none of which appears aimed at UK share schemes. Our post on EMI options and US citizens explains the same mismatch for a growth company plan. The difference here is the savings and payroll elements that Sharesave and SIP add.
How does the UK tax a Sharesave option and its bonus
Under Save As You Earn the employee saves a monthly amount under a three or five year contract, then can use the savings to buy shares at a price fixed in advance. GOV.UK states that the interest and any bonus are tax-free, and that there is no income tax or National Insurance on the difference between the price paid and the market value.
GOV.UK's guidance on employee share schemes (opens the official GOV.UK page in a new tab) sets a monthly savings limit and describes the scheme as a savings-related way to buy shares, with the plan rules governing what happens on leaving. Capital gains tax may apply when the shares are sold, with the gain usually running from the price paid. The UK computation follows the general rules on tax when you sell shares (opens the official GOV.UK page in a new tab).
There are routes to keep the eventual gain out of UK tax altogether. These protect UK tax only. The US does not follow either, so a US citizen still has a US gain or loss when the shares are sold, and an ISA brings its own US questions. Our UK Self Assessment service reports any gain on the SA100 return.
- Interest and any bonus on the savings contract: free of UK tax
- Exercise at the contract end: no income tax or National Insurance on the spread
- Sale of the shares: capital gains tax may apply on the growth
- Transfer of the shares into an ISA within ninety days of leaving the scheme: no capital gains tax
- Direct transfer into a pension when the scheme ends: no capital gains tax
How does the IRS tax a Sharesave option at exercise
Usually as compensation in the year of exercise. A Sharesave option cannot be transferred and is not traded, so it has no readily determinable value at grant and nothing is taxed then. At exercise, the market value of the shares less the price paid is compensation income on the US return, measured in dollars on that date.
Publication 525 adds that if the shares received are not substantially vested, the income is measured when they vest. Where the shares are delivered without forfeiture conditions, the exercise date is the taxing point. The amount taxed, plus the price paid, forms the US basis for the later sale on Form 8949 (opens the official IRS page in a new tab). A UK employer does not usually withhold US tax, so estimated payments may be needed.
The savings element is separate. The interest or bonus on the savings contract is tax-free in the UK, but a US citizen is taxed on worldwide income and the US does not follow the UK exemption. It is likely to be reportable as interest on Form 1040 for the year it is credited, and the savings account itself may count towards foreign account reporting while the contract runs.
How does the UK tax shares held in a Share Incentive Plan
A SIP holds shares in a UK trust for the employee. HMRC's manual states that there is no income tax or National Insurance when free or matching shares are awarded, or on the pay used to buy partnership shares. Shares kept in the plan for five years then come out free of income tax and National Insurance.
GOV.UK describes four kinds of award, each within limits set by the plan and by statute. A plan can also provide that free and matching shares are forfeited if the employee leaves within a period of up to three years from the award, which matters for the US timing below.
Taking shares out early brings a UK charge. HMRC's manual sets out that shares leaving the plan within three years are charged to income tax on their market value then. Between three and five years the charge is on the lower of the value at award, or the pay used, and the value at withdrawal. Good leaver rules can remove the charge. Shares sold from inside the plan are outside UK Capital Gains Tax (opens the official GOV.UK page in a new tab).
- Free shares: given by the employer within an annual limit
- Partnership shares: bought from salary before income tax and National Insurance
- Matching shares: given by the employer for partnership shares bought, up to a set ratio
- Dividend shares: bought with dividends on plan shares, free of income tax if kept for three years
When does a US citizen pay US tax on SIP shares
Usually earlier than the UK, and on amounts the UK does not tax. Partnership shares are bought with salary that is still compensation for US purposes. Free and matching shares are compensation when they become substantially vested, which may be at award or when any forfeiture period ends. Reinvested dividends are dividend income when paid.
Publication 525 says property received for services is taxed when it becomes substantially vested, meaning transferable or no longer subject to a substantial risk of forfeiture, on its value less any amount paid. Where a plan can take back free or matching shares from an employee who leaves early, the US income is likely to arise when that risk lapses. A section 83(b) election, due within thirty days of the transfer, may be available to bring it forward. Where there is no forfeiture condition, it probably arises at award.
The UK holding period is a different thing. A rule that delays withdrawal without risk of losing the shares is unlikely on its own to defer US income, though the plan rules need checking. Partnership shares are bought with pay the US has already taxed, so there is usually no further US income when they are bought, provided the price is market value. Dividends used for dividend shares are reported in the year paid, even though no cash reaches the employee.
Is a SIP holding a foreign trust or account to report
It may be, and the answer needs review. A SIP is a UK trust holding shares for employees, and a Sharesave contract is a UK savings account. Neither is excluded by name from US foreign trust, foreign account or foreign asset reporting, and we have found no IRS guidance that addresses UK employee share plan trusts directly.
The instructions to Form 3520 (opens the official IRS page in a new tab) list exceptions, including distributions taxable as compensation for services and reported as such, and certain deferred compensation and retirement arrangements. Whether a SIP fits any of them depends on how the trust is structured and taxed in the US. The same question arises for the FBAR (opens the official FinCEN page in a new tab), whose threshold of $10,000 is an aggregate across all foreign accounts, and for Form 8938.
A cautious approach is to include the Sharesave account and the SIP holding on the FBAR and on Form 8938 where the thresholds are met, and to keep the trust analysis on file. Our foreign income and FBAR service reviews the plan documents and prepares the FBAR (FinCEN 114) and Form 8938 where needed.
How do sourcing and the foreign tax credit work for these plans
Compensation is sourced by where the work was done. For a US citizen who has only worked in the UK, Sharesave and SIP income is foreign-source general category income. Because the UK charges no income tax on most of it, there is often no UK tax directly attached to credit against the US tax.
IRS guidance sources option income on a time basis over the period to which it relates, generally from grant until the option can be exercised, so for Sharesave that is usually the savings contract. Publication 514 (opens the official IRS page in a new tab) places compensation in the general category. Excess foreign tax credit (opens the official IRS page in a new tab) from UK tax on salary can sometimes absorb US tax on the Sharesave spread, and unused credits carry back one year and forward ten within the category, claimed on Form 1116.
Consider a US citizen employed in Leeds by a UK-listed retailer who joins both plans. At the end of her contract she exercises her Sharesave option and has US compensation on the spread, plus US interest on the bonus, with no UK tax on either. Her SIP partnership shares are bought from pay the US already taxes, and if she withdraws them before five years the UK charges income tax years after the US did. Our cross-border treaty relief service models that timing before shares leave the plan.
For RSUs and other awards, our post on RSUs when you move between the US and the UK sets out the workday split, and the guide to US-UK tax for founders, fund managers and executives covers the remaining plans. Our individual tax returns service prepares both returns from the same records.
- Sharesave contract, option certificate and annual savings statements
- SIP award statements showing free, matching, partnership and dividend shares
- The plan rules on forfeiture and leavers
- Payslips showing partnership share deductions
- Exercise, withdrawal and sale dates, values and exchange rates
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
