Introduction: The Buyout Award and the American Banker
A buyout award is the price a new employer pays to prise a senior banker away from a rival. When you resign, your unvested deferred bonuses and share awards are forfeited. Your new bank then grants a replacement package, usually a mix of deferred cash and shares, designed to put you back where you would have been. For a British banker, the tax treatment is broadly settled: the replacement is employment income from the new job, taxed when it is paid or vests.
For an American in London, however, a buyout award sits across two tax systems, two tax years and, often, two employers' malus regimes. The IRS asks which services the payment relates to, and the answer decides whether the UK tax can be credited at all. HMRC asks whether the payment is an inducement or compensation for a lost right. Meanwhile, the Prudential Regulation Authority requires the new bank to cut the award if your old bank says so, sometimes years later.
The pages currently ranking for this subject are law-firm briefings on the PRA rules, the most detailed running to about 2,100 words and dating from 2016, with no discussion of tax. None of them addresses a US taxpayer. In our experience working with managing directors, traders and portfolio managers who move between London banks and funds, the tax mechanics of a buyout award are where the most money is lost, usually because nobody reads the offer letter with both tax systems in mind.
This guide explains how a buyout award is regulated, how HMRC taxes cash and shares, how the IRS sources the income, and where the foreign tax credit fails. It then works through a real-number case study and sets out what to negotiate before you sign.
What a Buyout Award Replaces
Most senior bankers in London receive a large share of their bonus as deferred cash and deferred shares that vest over several years. Those awards are normally forfeited on resignation. A buyout award compensates you for that forfeiture. It may also include an upfront cash sum replacing a bonus you would have received for the current year, which is sometimes called a sign-on payment.
Consequently, a single move can generate three separate taxable items: an upfront cash payment, a series of deferred cash tranches and a series of share deliveries. Each has its own tax point on each side of the Atlantic.
Why This Matters More for US Citizens
A UK-only banker pays UK income tax and National Insurance on each tranche and nothing more. A US citizen or green card holder also reports every tranche to the IRS. If the IRS and HMRC agree that the income relates to work in London, the foreign tax credit usually eliminates the US tax. If they disagree, the same buyout award can be taxed twice. In addition, the timing of each tranche rarely matches across the UK's April year and the US calendar year.
How the PRA Regulates a Buyout Award
The regulatory rules shape the award, and the shape of the award drives the tax. For firms subject to the PRA Remuneration Part, the rules on buy-outs of variable remuneration have applied since 1 January 2017.
No More Value and No Faster Vesting
A buyout award for a material risk-taker may only compensate for what you lose. It must not be worth more than the forfeited awards and must not vest faster. As a result, the replacement normally mirrors your old vesting schedule, tranche by tranche, and is valued by reference to your old employer's share price at the time you leave.
Reduction Notices From Your Former Employer
The distinctive feature of the regime is that your old bank keeps a hand on the replacement. Before the buyout is agreed, it must tell your new employer what you are forfeiting and the malus and clawback terms that applied. Afterwards, if the old bank would have reduced your forfeited awards, for example after uncovering a conduct issue, it can issue a reduction notice. Your new bank must then reduce the buyout award by the specified amount, and you have the right to make representations before that happens.
The 2025 Reforms to Deferral
The PRA and FCA's joint remuneration reform policy statement, PS21/25, took effect on 16 October 2025. All material risk-takers now face a four-year minimum deferral period, and deferred instruments no longer need a separate retention period, although upfront instruments still carry 12 months' retention. Consequently, a buyout award replacing pre-reform awards may now mirror longer schedules than your new bank's own awards, which matters for both 409A and the timing of UK tax.
How HMRC Taxes a Buyout Award
The UK position is straightforward in principle, although the details of share awards need care.
Earnings From the New Employment
HMRC's view, set out at EIM00700 on inducement payments, is that a payment to induce someone to take up employment is taxable as earnings under section 62 of ITEPA 2003. A buyout award fits that description precisely. The narrow exception at EIM00710, for compensation for the surrender of a personal asset or valuable right unconnected with employment, does not help, because forfeited bonuses are themselves employment rights.
Deferred cash is taxed when it is paid, under the receipt basis for general earnings. Therefore, each cash tranche is taxed in the UK tax year of payment at your marginal rate, currently 45% above £125,140, as shown on the income tax rates page. Employee National Insurance at 2% applies above the upper earnings limit, and employer contributions at 15% apply in full, according to HMRC's National Insurance rates and allowances.
Share Tranches and Restricted Securities
Share-based buyouts are usually granted as conditional awards or restricted stock units, taxed when the shares are delivered. If the delivered shares carry a retention period, they are restricted securities. In that case, UK tax on delivery is based on the restricted value, and a further charge arises when the restriction lifts, unless you make a joint election with your employer under section 431 of ITEPA 2003 within 14 days of acquisition to be taxed on the full unrestricted value up front.
For an American, the section 431 election is usually the right answer. The IRS taxes the full market value on delivery, because a sale restriction is not a substantial risk of forfeiture under section 83. Without the election, the UK taxes less in the delivery year and more later, which breaks the foreign tax credit matching.
Malus, Clawback and Negative Earnings
If a reduction notice cuts an unvested tranche, nothing was ever taxed, so there is no tax consequence on either side. However, if clawback recovers amounts already paid, the UK treats the repayment as negative earnings in the year you repay, as HMRC explains at EIM00810. The US relief works differently and often fails for UK residents, as our guide to clawed-back bonuses and section 1341 explains.
How the IRS Taxes a Buyout Award
On the US side, a buyout award is compensation for services. It is included in income when paid in cash or, for shares, when they are delivered and no longer subject to a substantial risk of forfeiture. The key questions are where the income is sourced and whether section 409A applies.
Sourcing: Which Services Does the Payment Relate To?
Compensation is sourced where the services are performed. Under Treasury Regulation 1.861-4, multi-year compensation is apportioned on a time basis over the period to which it is attributable, and that period is determined on the facts and circumstances.
For a banker who moves between two London firms, both possible periods are London periods, so the income is foreign source either way. However, for a banker who moves from New York to London, the answer is critical. If the buyout award is attributable to future services with the new employer in London, it is foreign source, and UK tax on it is creditable. If the IRS attributes it to the past New York services that earned the forfeited awards, it is US-source income, the foreign tax credit limitation is nil, and HMRC still taxes the whole amount as London earnings.
Section 409A and the Short-Term Deferral Exception
US citizens remain subject to section 409A on deferred compensation from foreign employers. Most deferred cash buyouts fall within the short-term deferral exception, because each tranche is paid shortly after it vests and vesting depends on continued employment. Nevertheless, where the forfeited award had already vested but was simply deferred, for example under a retirement provision, a replacement without a genuine service condition can be deferred compensation. It must then follow a fixed payment schedule, or you face a 20% additional tax plus interest.
The Foreign Tax Credit and National Insurance
Assuming the income is foreign source, the UK income tax is creditable on Form 1116 in the general category, under the rules summarised in the IRS foreign tax credit guidance. Because 45% exceeds the top US rate of 37%, the US tax on the buyout award is normally eliminated, with excess credits carried forward. National Insurance, however, is not creditable, because the US-UK totalisation agreement covers it instead.
The Timing Mismatch Between Two Tax Years
The UK tax year ends on 5 April, while the US year ends on 31 December. A buyout award tranche paid in March falls in the UK year that is closing and the US calendar year that has just begun. Therefore, the UK tax on that tranche and the US income it relates to can land in different US years.
Upfront Payments Around 5 April
Many banking moves happen in the first quarter, after bonuses are paid. An upfront buyout award paid in late March lands in one UK year, while a tranche paid in April lands in the next. For US purposes, both fall in the same calendar year. Consequently, the UK tax must be apportioned by payment date, not simply copied from the UK return.
Carrybacks and Carryforwards
When credits and income fall in different US years, excess credits carry back one year and forward ten years. In addition, an accrual-basis election for foreign tax credits can align the UK tax with the year it relates to. Our guide to deferred bonus awards for bankers in London sets out the cash versus accrual choice in detail.
Moving From New York to London With a Buyout Award
A cross-border move is where a buyout award becomes genuinely dangerous. The payment is negotiated in America, relates to awards earned in America, and is paid in Britain.
The Double Tax Scenario
Suppose you leave a New York bank in January and join a London bank in February. HMRC will treat the replacement as earnings of your London employment and tax it in full when it is paid, because you are UK resident and working in London at that time. The IRS, by contrast, may argue that the replacement relates to your New York service. If it succeeds, the income is US-source, and your UK tax cannot be credited against it. The result can exceed 80% combined tax on the same pound of pay, before National Insurance.
Why the Offer Letter Decides the Outcome
Because the US sourcing test turns on facts and circumstances, the drafting of the offer letter matters enormously. A buyout award that vests only if you remain employed by the new bank, is described as consideration for joining and future performance, and carries its own repayment conditions tied to your new role, points firmly to London services. In contrast, wording that describes it purely as compensation for what you gave up in New York points backwards. Our guide to signing bonus sourcing when you move mid-contract explains the time-basis formula for upfront payments.
Split Years and Treaty Residence
In the year you arrive, split-year treatment may apply in the UK, and the treaty residence tie-breaker can matter if you are resident in both countries. Payments received before your UK residence starts may fall outside UK tax altogether. Therefore, the date on which each part of the buyout award is paid should be planned around your arrival date, not left to payroll convenience.
Case Study: A Managing Director Moving Between London Banks
Consider a US citizen who has lived in London since 2017 and works as a managing director. In March 2026, they resign from one bank and join a rival. They forfeit £400,000 of deferred cash and £600,000 of deferred shares, and the new bank grants a buyout award mirroring those amounts and vesting dates across 2027 to 2029. In addition, they receive £200,000 of upfront cash in April 2026 to replace their forfeited 2025 bonus.
The Upfront Payment
In the UK, the £200,000 is taxed in 2026/27 at 45%, which is £90,000 of income tax, plus £4,000 of employee National Insurance at 2%. In the US, at an illustrative rate of $1.32 to the pound, the payment is $264,000 of 2026 wages, and the US tax at 37% is $97,680. The UK income tax of $118,800 is fully creditable, so the US tax is nil, and $21,120 of excess credit carries forward. The National Insurance is a real cost with no US relief.
The Share Tranches
The first £200,000 share tranche is delivered in March 2027 with a 12-month retention period. Without a section 431 election, the UK would tax a discounted value in 2026/27 and the remainder when the restriction lifts in 2027/28, while the IRS taxes the full $264,000 in 2027. We made the election within 14 days, so both countries taxed the same value in the same period, and the credit matched.
The Reduction Notice
In 2027, the former bank issued a reduction notice after an internal review, cutting the 2028 cash tranche by £50,000. Because the tranche had not vested, neither country had taxed it, so the reduction had no tax consequence. Had it been recovered after payment, the UK negative-earnings relief and the US claim-of-right rules would have produced very different results. Overall, the client's combined tax on the buyout award matched a UK-only colleague's except for the National Insurance, which is exactly the outcome careful planning should deliver.
What to Negotiate Before You Sign
The best time to fix the tax on a buyout award is before the offer letter is signed. Banks are used to negotiating structure, even when they will not move on value.
Wording and Conditions
Ask for the buyout award to be described as consideration for joining and for future services, with vesting conditioned on continued employment with the new bank. If you are relocating from the US, this is the single most valuable change you can make.
Payment Dates
Ask for upfront cash to be paid after you become UK resident, and consider whether tranches falling close to 5 April can move to align with your US year. Additionally, check that any deferred cash tranche is paid within the short-term deferral window.
Share Mechanics and Accounts
Confirm that the new bank will co-sign a section 431 election on share deliveries. Also, check where delivered shares will be held. Shares in a UK nominee or plan account can make that account a foreign financial account, reportable on your FBAR under FinCEN's foreign account reporting rules and potentially on Form 8938. Our guide to cross-border RSU tax covers the vesting mechanics.
How TaxYork Can Help
TaxYork prepares US and UK tax returns for American bankers, traders and fund professionals in London. We review buyout award offer letters before signature, model the tax on each tranche in both countries, prepare section 431 elections, and build the Form 1116 schedules that keep credits matched to income.
Moreover, where a move has already happened and the returns were prepared without cross-border analysis, we review prior years for mis-sourced income and lost credits, and file amended returns where they pay. Our tax treaty optimisation service handles residence and sourcing disputes, and our guide to garden leave pay covers the other end of the same move.
Conclusion
A buyout award makes a move between banks financially neutral, but only if the tax follows. For an American in London, HMRC taxes the replacement as earnings of the new job, while the IRS sources it according to the services it relates to. When both agree that the services are in London, the foreign tax credit works and the only extra cost is National Insurance. When they disagree, particularly on a move from New York, the same pay can be taxed twice.
The difference is almost always made before signature: in the wording of the offer letter, the payment dates and the share mechanics. Handled carefully, a buyout award is taxed once, in the right year and at the right rate.
Contact Us
If you are negotiating a move or have already received a replacement package, book a consultation with our US-UK specialists. We will review your offer letter, model each tranche and prepare both returns correctly.
Email hello@taxyork.com or call 020 3488 8606 to speak to the team.
Disclaimer
This article provides general information about the US and UK taxation of replacement remuneration for employees changing employers and does not constitute tax, legal, regulatory or employment advice. Tax rules change frequently and their application depends on your individual circumstances. You should obtain professional advice tailored to your situation before acting on any information in this article. TaxYork accepts no liability for actions taken or not taken on the basis of this content.