Accounting

End-of-Service Gratuity in the UAE: How to Calculate

2026-01-28 · 4 min read · By Aureus Worldwide

End-of-service gratuity is a statutory benefit that UAE employers must pay eligible employees when their employment ends. Governed by the UAE Labour Law, it is calculated on the employee's basic salary and length of service, and getting it wrong is a common source of disputes and unexpected liabilities. This guide explains how gratuity is calculated, the key rules to apply, and how to provide for it properly in your accounts. Because the law evolves, confirm the precise rules and any updates with current legislation.

What gratuity is

Gratuity is a lump-sum payment owed to an employee at the end of their service, in recognition of their period of employment. It is a legal entitlement rather than a discretionary bonus, and it accrues over time. For employers, it represents a growing liability that should be tracked and provided for, not discovered only when someone leaves. For employees, it is an important part of the overall reward package.

Who is entitled

In general terms, an employee who completes at least one year of continuous service is entitled to gratuity on the end of their employment. The amount, and in some cases the proportion payable, can depend on the length of service and the circumstances in which employment ends. Certain situations and categories can affect entitlement, so the precise outcome should be checked against the current Labour Law and the specific facts.

The calculation basis

Two principles drive the calculation:

• Basic salary: Gratuity is calculated on the employee's basic salary, generally excluding allowances such as housing, transport and similar, using the last drawn basic wage.
• Length of service: The entitlement accrues per year of service, with a different rate for the first five years and for years beyond five.

The total is also subject to overall limits set by the law. Confirm the exact rates, components and any caps with current legislation.

A worked example

Suppose an employee with a basic salary of AED 10,000 per month leaves after exactly six years of service. The calculation works in two parts:

1. Daily basic wage: AED 10,000 ÷ 30 = AED 333.33 per day (a common convention; confirm the basis applicable to your case).
2. First five years: 5 years × 21 days × AED 333.33 = AED 35,000.
3. Sixth year: 1 year × 30 days × AED 333.33 = AED 10,000.
4. Total gratuity: AED 35,000 + AED 10,000 = AED 45,000.

This illustrates the mechanics; the actual figure depends on the exact basic salary, the precise service period (including partial years), the applicable rules and any limits. Always validate against current law.

Partial years and end circumstances

Two factors often complicate real calculations. First, employees rarely leave on an exact anniversary, so partial years must usually be pro-rated. Second, the circumstances of departure, resignation versus termination, and the length of service, can affect the amount payable under the rules. Because these nuances can change the result significantly, check the current Labour Law provisions for the specific situation rather than assuming the simple formula always applies.

Accounting for gratuity

From an accounting perspective, gratuity is a liability that builds up as employees accrue service. Good practice is to recognise and provide for this obligation over time, so the financial statements reflect the true cost of employment and there is no nasty surprise when several long-serving staff leave. Many businesses calculate an end-of-service provision at each reporting date. This connects directly to disciplined accounting and to your wider payroll management.

Treating gratuity as a provision that grows each year, rather than a cost only at departure, gives a far more accurate picture of the business.

This matters most for businesses with several long-serving employees, where the accumulated gratuity liability can be substantial. Recognising it gradually means the cost is spread fairly across the years the employees actually worked, and there is no sudden hit to profit or cash when a wave of long-tenured staff eventually leave. It also gives a truer view of the company's real obligations for owners, lenders and auditors.

Common mistakes

Employers frequently get gratuity wrong by:

• Calculating on total salary instead of basic salary
• Forgetting to pro-rate partial years of service
• Overlooking the change in accrual rate after five years
• Failing to provide for the liability in the accounts over time
• Not reflecting the latest changes in the Labour Law

Gratuity in the wider employment lifecycle

Gratuity is the final step in the employment lifecycle that begins with hiring and runs through monthly payroll. Accurate employee and salary data, the same data that feeds the Wages Protection System, makes the gratuity calculation straightforward at the end. Keeping basic salary clearly separated from allowances, and tracking service dates accurately, removes most of the difficulty when someone leaves.

How Aureus Worldwide helps

Aureus Worldwide helps employers calculate and provide for end-of-service gratuity correctly, applying the right basic-salary basis and accrual rates, pro-rating service, and building gratuity provisions into your financial statements, through our accounting and BPO and payroll teams. We keep your gratuity, payroll and WPS aligned across the employment lifecycle. We confirm the precise rules with current legislation. To review your gratuity calculations and provisions, contact us.

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