Employee share scheme tax in South Africa: how section 8C works

When restricted shares or options from your employer vest, section 8C of the Income Tax Act taxes the gain as ordinary income at your marginal rate, and your employer withholds PAYE on it. The gain is the market value on the vesting date less whatever you paid for the instrument. Only the growth after that vesting date is a capital gain, taxed under capital gains tax when you eventually sell.

That split is the whole point of how an employee share scheme is taxed: one revenue event when the shares vest, and a separate capital event when you sell. Keeping the two straight is what stops you from either overpaying or being caught out by a PAYE deduction you did not budget for.

Two separate taxable events

A common mistake is to treat a share award as a single moment of tax. In practice there are two, and they can fall years apart.

• Vesting. This is when section 8C bites. The gain built up to the vesting date is included in your income and taxed at your marginal rate, the same way a salary or bonus is. Your employer must apply to SARS for a tax directive and deduct employees' tax on the gain.
• Later disposal. Once the instrument has vested, it is an ordinary capital asset in your hands. When you sell, only the increase in value after vesting counts as a capital gain, subject to capital gains tax.

SARS Interpretation Note 55 sets out the section 8C rules and confirms the trigger is vesting, not the earlier grant or award of the shares.

What section 8C actually taxes

Section 8C applies to an equity instrument you acquired by virtue of your employment or your office as a director. The definition is wide: a share, an option to acquire a share, or a financial instrument convertible into one.

A restricted equity instrument is one you cannot yet freely sell at market value, typically because you have to stay employed for a set period or forfeit the shares if you leave. That restriction is what delays the tax. An unrestricted instrument vests when you acquire it; a restricted one vests on the earlier of the restrictions falling away, the option terminating, or a disposal.

At vesting, the gain is the market value on the vesting date less any consideration you paid. That gain is deemed to be remuneration, so your employer withholds employees' tax on it under paragraph 11A of the Fourth Schedule, using a SARS tax directive. It shows on your IRP5 under source code 3718. Because it is ordinary income, no annual exclusion and no inclusion rate apply: the full gain is taxed at your marginal rate.

This carries the same character as a cash incentive or a restraint of trade payment, which is likewise taxed in full at your marginal rate via PAYE. The vesting gain is neither a dividend nor a capital receipt; it is ordinary remuneration.

Worked example: vesting, then a later sale

Assume the 2026 year of assessment (1 March 2025 to 28 February 2026). You earn a salary of R600,000. You were awarded restricted shares two years ago, paying R50,000 for them, and this year the restrictions fall away. On the vesting date their market value is R250,000.

Step 1: the section 8C gain at vesting.

• Market value at vesting: R250,000
• Less consideration you paid: R50,000
• Section 8C gain included in income: R200,000

Step 2: tax on that gain at your marginal rate. The gain sits on top of your R600,000 salary, so it is taxed across the R512,801 to R673,000 band (36%) and the R673,001 to R857,900 band (39%) of the 2026 individual table.

• Tax on R800,000: R179,147 + 39% of (R800,000 − R673,000) = R179,147 + R49,530 = R228,677, less the primary rebate of R17,235 = R211,442
• Tax on R600,000 alone: R121,475 + 36% of (R600,000 − R512,800) = R121,475 + R31,392 = R152,867, less R17,235 = R135,632
• Extra tax caused by the R200,000 gain: R211,442 − R135,632 = R75,810

That R75,810 is what your employer withholds via the directive. It works out to 37.9% of the R200,000, because the gain straddles the 36% and 39% brackets: R73,000 at 36% is R26,280, and R127,000 at 39% is R49,530.

Step 3: the later sale. The R250,000 market value taxed at vesting becomes your base cost, so capital gains tax applies only to growth above it. Say you later sell all the shares for R330,000, with no other capital gains that year. These figures use the 2026 annual exclusion of R40,000.

• Proceeds: R330,000
• Less base cost (market value at vesting): R250,000
• Capital gain: R80,000
• Less the 2026 annual exclusion of R40,000, leaving R40,000
• Included at the 40% inclusion rate: R16,000 added to your taxable income
• With the same R600,000 salary, that R16,000 sits in the 36% band, so the CGT is R16,000 x 36% = R5,760

The same shares therefore produced R75,810 of income tax at vesting and R5,760 of CGT on disposal, taxing each layer once. The maximum effective CGT rate for an individual is 18%, so the capital portion is always lighter than the vesting gain. You can see how a share disposal is built up in the guide on tax on selling property or shares in South Africa, and test the marginal effect of a lump sum on your own income with the basic income tax calculator.