Exercising options now vs paying more tax later

A chunk of unapproved options vested earlier this year. I had a decision in front of me: exercise the options now and hold the shares, or leave them as options and figure out what to do later. The decision is mostly a tax question, and the numbers were big enough that I sat down with a spreadsheet for a few hours rather than ask the internet.

One important caveat upfront: I don't actually know when I'll be able to sell. There's no committed secondary window. The "baseline" case below assumes I could sell at today's price, which is a useful hypothetical for sizing the tax bill but is not necessarily something I can do tomorrow. The real choice is between paying tax now to lock in CGT treatment, or carrying option-shaped exposure and paying full income tax whenever a liquidity event eventually shows up.

The setup

The relevant rates for me (additional-rate income, employer NIC passed through to the employee under a Section 431 election, which is standard for unapproved options at private companies):

• Income tax: 45%
• Employee NI: 2%
• Employer NIC: 15% (the rate after last year's hike, and yes it lands on me)
• CGT: 24%

On exercise, the spread between strike and market price is taxed as income at the full stack. Anything that happens after exercise gets CGT treatment instead.

The taxable spread today is about 71% of the current market price. That is, my strike is roughly 29% below current FMV, so 71% of the current price is the chunk that takes the income-tax hit if I exercise. Once employer NIC has flowed through the calculation, the effective income-tax-equivalent rate on the spread works out at roughly 55%. CGT is a flat 24%.

So the question is: how much of the final gain do I want sitting in the 55% bucket vs the 24% bucket?

For numbers, the position is roughly this. At today's market price, the shares would be worth around £415k gross. The exercise cheque if I want to go the other way is around £165k upfront, all of which is income tax on the spread (the options themselves have a nil strike, so there's no separate purchase cost). Everything below uses those two anchor numbers, with the standing caveat that "sell at today's price" is a sizing assumption rather than a real button I can press.

Scenario 1: Don't exercise, sell at today's price (hypothetical baseline)

Cleanest option from a cash-flow standpoint, if it were actually available. No exercise cheque to write. The entire proceeds get taxed at the full income stack.

• Pay upfront: £0
• Tax bill: ~£230k (roughly 55% of gross proceeds)
• Net: ~£190k

This is the floor. Everything else is measured against it.

Scenario 2: Exercise now, sell at this round

The pure tax-arbitrage trade with no growth assumption. Income tax on the spread today, then CGT on the small gap between today's spread and today's market price.

• Pay upfront: ~£165k (income tax on the spread)
• Net: ~£225k
• Savings vs Scenario 1: ~£35k (roughly 20% of net)
• Return on the cash paid today: roughly 23%

A 23% return for a few-month hold isn't bad. But this is the worst version of the exercise-now case, because it assumes zero growth from here.

Scenario 3: Exercise now, sell at the next round at ~1.3x

Here is where the structure starts paying off.

The exercise fixes the income-tax base at today's spread. All the future growth (the bit between today's market price and whatever the next round prices at) only sees CGT at 24%.

• Pay upfront: ~£165k (same as Scenario 2. The income-tax bill is set at exercise.)
• Net: ~£330k (vs ~£250k if I held and sold the same shares at next round without exercising)
• Savings: ~£80k (roughly 32%)
• Return on the cash paid today: roughly 49%

Scenario 4: Exercise now, sell at the next round at ~2x

Same shape, bigger lever.

• Pay upfront: ~£165k
• Net: ~£415k (vs ~£300k if not exercised)
• Savings: ~£115k (roughly 38%)
• Return on the cash paid today: roughly 70%

Scenario 5: Exercise now, sell at the next round at ~3x

The headline case.

• Pay upfront: ~£165k
• Net: ~£750k (vs ~£500k if not exercised)
• Savings: ~£250k (roughly 50%)
• Return on the cash paid today: roughly 150%

Half. Half of the final gain in the 3x case lands in my pocket purely because I prepaid income tax on the spread today.

The catch: it's a real cheque

The exercise cost plus the income tax due is genuinely large. A meaningful fraction of a year's take-home, written today, against a company that could absolutely go to zero, or not have another liquidity event for years, or only have one at a flat or down valuation.

If the company is flat or down to the next round, I've prepaid tax on a notional gain that didn't happen, and there is no relief to claw any of it back. The cash is gone. That risk is the entire reason this trade has a return attached to it in the first place.

So the trade looks like this:

If valuation does this	Net if I exercise	Net if I don't	Savings
Stays flat	~£225k	~£190k	~£35k (20%)
Goes to ~1.3x	~£330k	~£250k	~£80k (32%)
Goes to ~2x	~£415k	~£300k	~£115k (38%)
Goes to ~3x	~£750k	~£500k	~£250k (50%)
Goes to zero	-£165k (full loss of upfront cash, no relief)	£0	n/a

What I did

I exercised so expect a dip in my liquid funds next month!

The base case (a flat-to-modest next liquidity event whenever it lands) is worth doing on its own. A 49% return on the tax paid today at a 1.3x outcome is hard to walk past, and the asymmetry on the upside is structural rather than a bet. I'm not assuming a 3x outcome. But if it happens, I'd rather have set up the tax structure now than realise I left half the gain on the table.

The fact that I don't know when I can sell actually pushes me toward exercising, not away from it. If there's no near-term sale, then every month I hold option-shaped exposure is a month the company is presumably growing, and that growth gets income-taxed if I haven't exercised. Exercising stops that clock.

The affordability test for me was simple: am I OK if this exercise cheque is gone forever? I'm OK with that. The cash came out of money I wasn't planning to invest in anything liquid for the next few years anyway. If exercising would mean borrowing, or selling something else I actually need, the upside math doesn't change but the downside risk gets a lot heavier, and I'd think harder.

A note on tax residency

One last thing that shaped the call. The income-tax portion is settled at exercise. It runs through PAYE in the month I exercise and is locked at UK rates regardless of where I live afterwards. The CGT portion is different: it's charged by whichever country I'm tax-resident in when I eventually sell. The UK headline rate is 24%, but several jurisdictions tax long-term capital gains at 0%. Singapore, the UAE, and a few European setups under specific regimes.

This isn't a "move abroad to dodge tax" pitch. The five-year temporary-non-residence rule pulls you back into UK CGT if you return too soon, and properly breaking UK tax residency is harder than people assume. But the asymmetry is real: the income tax is paid no matter what, and the CGT can be reduced or zeroed by a move I might end up making anyway. It's another argument for exercising earlier rather than later: a smaller chunk in the unavoidable bucket, a bigger chunk in the maybe-avoidable one.