Incentive stock options (ISOs): How they work

If you work for a U.S. company — especially a start-up or scale-up — you may come across the acronym ISO.

ISOs are a U.S. employee share option scheme with their own set of tax rules. They work quite differently from UK share schemes such as EMI.

For UK-based employees who hold U.S. equity — or those relocating between the UK and the U.S. — understanding these differences matters.

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What does ISO stand for?

Incentive Stock Options (ISOs) are a U.S. tax-qualified employee benefit designed to reward staff and offer favourable tax treatment under U.S. law.¹

If strict Internal Revenue Service (IRS) rules are met, ISOs allow employees to buy company shares at a fixed price and defer most tax until the shares are sold — often at capital gains rates rather than ordinary income.²

If those rules aren’t met (for example, if shares are sold too soon), some or all of the gain may instead be taxed as ordinary income.

This differs from receiving ordinary shares, which you own immediately. Ordinary shares don’t come with special tax treatment, discounted purchase prices or deferred taxation — and tax may apply as soon as you receive them.

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What are incentive stock options?

Incentive Stock Options (ISOs) are a type of employee share option where your employer gives you the right to buy company shares at a fixed price (known as the exercise price), set on the grant date.¹

They do not automatically become shares. You must actively choose to exercise the option to buy the shares.

ISOs can only be granted to employees — not contractors or advisers.

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How do incentive stock options work?

Here’s a step-by-step breakdown of how ISOs typically work:³

Grant

Your employer gives you the option to buy a certain number of shares in the future at a fixed price, usually based on the company’s value at the time.

Vesting

You earn the right to use those options over time — for example, 25% per year over four years. Until options vest, you can’t exercise them.

Exercise

Once vested, you can choose to buy the shares by paying the exercise price. At this point, your options turn into actual shares — but you’re not required to exercise them.

Sale

After exercising, you can sell the shares immediately or hold onto them. The timing of the sale can affect how they’re taxed, particularly under U.S. rules.

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Who can receive ISOs?

ISOs are typically issued by U.S. companies and can only be granted to employees — not contractors or advisers.

To qualify for U.S. tax benefits, ISOs must meet strict IRS requirements, including rules around exercise price, holding periods and employment status.

By contrast, UK companies use different share schemes. HMRC-approved, tax-advantaged options include:

• Enterprise Management Incentives (EMI)
• Share Incentive Plans (SIP)
• Save As You Earn (SAYE)⁴

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How are ISOs taxed?

In the U.S.

• At grant: ISOs are not taxed when granted
• At exercise: There’s usually no ordinary income tax, but the difference between the exercise price and market value may trigger Alternative Minimum Tax (AMT)⁵
• At sale: Tax is generally paid when the shares are sold — often as capital gains if holding-period rules are met

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In the UK

If you’re UK-resident, the situation is different.⁶

The UK does not recognise the special U.S. tax treatment for ISOs. In many cases, gains may be taxed as employment income rather than capital gains.

In cross-border situations, the UK–U.S. double taxation treaty may help prevent being taxed twice, depending on your circumstances. These may include:

• Relocating between the U.S. and the UK
• Holding U.S.-listed shares while UK-resident
• Receiving proceeds in U.S. dollars and converting or managing them in the UK

If you receive proceeds in a foreign currency, you may need to convert or transfer money internationally. A Wise account lets you hold and convert multiple currencies with low, transparent fees — using the mid-market exchange rate.

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The content in this article is for informational purposes only and does not constitute legal or tax advice. You should consider seeking independent professional advice before making financial decisions.

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ISOs vs other equity types

At first glance, ISOs may seem similar to other U.S. equity compensation types, such as:

• NSOs (Non-qualified stock options)
• RSUs (Restricted Stock Units)

However, there are key differences.

NSOs can be granted to employees, contractors and advisers, and are typically taxed as ordinary income when exercised.

RSUs give you shares outright once vesting occurs. At that point, they’re taxed as ordinary income, with no exercise required.

In the UK, EMI options are often considered the closest equivalent in practice. These can offer tax advantages if HMRC rules are met.

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Receiving proceeds from ISOs with Wise

As a UK resident, you might receive ISO proceeds from a U.S. brokerage or share plan provider.

If your proceeds are paid in USD, you may need to convert them into GBP — or choose to hold them in foreign currency.

With a Wise account, you can:

• Hold money in 40+ currencies
• Convert currencies using the mid-market exchange rate
• Avoid hidden foreign exchange markups
• Send and receive international payments in one place

This can be useful if you’re paid in USD but spend in GBP — helping you manage currency conversion more efficiently.

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FAQs: ISOs

Are incentive stock options (ISOs) available in the UK?

ISOs are not offered by UK employers. They are a U.S.-specific, tax-advantaged option type.

What is the difference between ISO vs NSO?

ISOs may receive favourable U.S. tax treatment if conditions are met, while NSOs are taxed as ordinary income at exercise and can be granted more broadly.

Do you pay tax when you exercise ISOs?

In the U.S., exercising ISOs usually does not trigger regular income tax, but it may trigger Alternative Minimum Tax (AMT). Tax is typically due when shares are sold.

Can UK residents receive ISO payouts?

Yes, UK residents can receive ISOs from a U.S. employer. However, the UK does not recognise the same tax treatment, and gains may be taxed as employment income and may be subject to National Insurance.⁷

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Sources used:

1. Charles Schwab – Incentive Stock Options (ISOs): Taxes and Key Rules
2. Internal Revenue Service – Stock Options
3. Qapita – What are incentive stock options and how do they work?
4. GOV.UK – Tax and Employee Share Schemes
5. Internal Revenue Service – Alternative Minimum Tax (AMT)
6. Moore Kingston Smith – US Stock Incentives for UK Employees
7. Türner & Co – UK Tax and Payroll Compliance for Share Options

Sources last checked: 4 March 2026.