US Taxation and Shares vesting advice ??

If I'm reading you correctly, five years ago you were allocated those shares on a restricted basis ie locked up for five years and not available to you before then.

I'm assuming you and the company didn't make any tax election to treat those restricted shares as if they were unrestricted shares five years ago - because that could have resulted in you needing to pay tax and NI on the value of the benefit of you receiving fully unrestricted shares, even though they were restricted at that point and you'd have needed to surrender them if you'd left the firm during the five years.

So, that generally means you will just be treated as having suddenly been given 500 valuable shares by your employer at the point of vesting, ie when you're allowed to have access to them (rather than five years ago when you couldn't do anything with them). As a share based incentive deal run by an American company (rather than an HMRC approved sharesave or UK employee share incentive scheme) there probably won't be any special UK tax breaks.

So if you're given 500 shares free and clear to do what you want with... as compensation for the work you do as part of your UK employment... and those shares are worth (say) $13k or £10k... you can see where this is going.... you're going to need to pay UK tax and national insurance on that £10k of UK earnings.

Most of the people who get valuable share-based compensation from their employers are high rate taxpayers, and the marginal rate of tax for a UK high rate taxpayer is 40%. And if you're in the high rate tax bracket, you pay 2% NI on every new pound of employment income. Combined, that's 42%. Your employer needs to ensure the tax and NI is paid over to HMRC under PAYE, but depending on the value of these 500 shares they gave you, it might be impractical to withhold that amount of extra tax and NI from you (out of your ordinary payslip with your monthly salary) for this one off event, because that might leave you with very little net pay, or even negative.

So, the suggestion from the shareholder services person is that either

-you can send them all the tax and NI that needs to be given to HMRC, for them to pass on, and then you will have the shares all to yourself to do whatever you want with. Or,

- they can sell a percentage of the shares to settle the tax and NI bill (ie, about 42% of the shares, assuming the market price hasn't moved much since the date of vesting), and then the remaining shares will be yours to do whatever you want with ; you'll have fewer shares but won't need to have laid out any cash to pay the tax on your "income".

So in summary this unavoidable 42% of tax is nothing to do with US income tax (as you're not a US employee, and it can't be US tax on the dividends as the shares only vested last week and presumably no dividends are due yet). It is just plain and simple UK income tax and UK NI.

It might be that actually you are not a UK high rate taxpayer on all of this money, and the share services person has just assumed you are because most of their UK senior staff are. Perhaps for example you are only a basic rate taxpayer paying 20% income tax and 12% NI for a total of 32%. In that situation, if they sell 42% of the shares to raise money, there is more cash available to pay the tax than your eventual tax bill. So if they made the wrong assumption and it got overpaid this month, it would be sorted out and normalised across later payslips later this year.

Or alternatively perhaps with this big bonus you are an even higher rate taxpayer and owe more UK tax than 40%+2%. If you underpay, it will still catch up with you in the end.

Edit - Daniel beat me to it by being more succinct!