Gratuity Calculation in the UAE: Why Your Accounts Must Show It as a Liability

How to calculate gratuity in the UAE, and why it belongs in your accounts

End-of-service gratuity in the UAE is calculated at 21 days of basic salary for each of the first five years of service, and 30 days of basic salary for each year after that, under UAE Federal Decree-Law No. 33 of 2021. The part most guides skip is the accounting: gratuity is a liability that builds every month an employee works, not a bill that appears the day they resign. If your books only record it on departure, they understate what you genuinely owe.

That gap matters the moment someone reviews your accounts. A bank assessing you for a facility, or the Federal Tax Authority looking at a corporate tax return, expects your balance sheet to reflect real obligations. A missing gratuity liability is one of the first things a careful reviewer notices, and it is the kind of thing we clean up regularly when businesses come to us mid-year.

How is gratuity calculated in the UAE? The end of service formula

Under Federal Decree-Law No. 33 of 2021, the entitlement is based on your employee's last basic salary, excluding allowances such as housing, transport and commissions. The structure is:

1. 1First five years of service: 21 days of basic salary for each full year.
2. 2Beyond five years: 30 days of basic salary for each additional year.

There are conditions and pro-rata rules for partial years, and the total is capped at two years' remuneration. The exact figure for any one employee depends on their basic salary, their start date and their contract terms, so we confirm the precise calculation against the actual contract in a review rather than asserting a single number that may not fit your case.

The point to hold onto: this liability exists from day one of employment, not from the day of resignation.

Why booking gratuity only when someone leaves is wrong

Booking gratuity only at settlement is the most common bookkeeping mistake we see in small UAE companies with staff. It produces a balance sheet that looks healthier than it is, because a genuine, growing obligation sits nowhere in the accounts until the bill lands.

Consider a company with ten employees who have each been there three years. Under the formula, that is a real accrued liability of many months of basic salary. If none of it appears in the books, the accounts overstate net assets and understate liabilities by exactly that amount. When several people happen to leave in the same year, the settlement hits the profit and loss all at once, distorting that year's result and making the accounts harder to read.

Accounts that swing like this are difficult for a bank to trust and awkward to defend in an FTA review. The fix is to recognise the cost as it is earned.

Gratuity is a liability: how to accrue it monthly for every employee

Gratuity should be accrued monthly for every eligible employee, from the start of their employment. Each month, the incremental gratuity earned by each staff member is booked as an expense and added to an end-of-service provision on the balance sheet. When someone eventually leaves, the settlement is paid out of that provision rather than landing as a sudden new cost.

Done this way, three things improve at once:

• Your balance sheet shows the true liability you carry to your team.
• Your monthly profit reflects the real cost of employing people.
• A departure is a payment out of a provision you already funded, not a shock to the year's numbers.

This is standard, defensible accounting, and it is exactly the discipline we build into the bookkeeping we run for clients. If you want this set up and maintained properly, our accounting and bookkeeping service keeps the provision current every month so it is never reconstructed under pressure.

What an auditor or the FTA expects your settlement calculation to show

An auditor expects to see end-of-service benefits recognised as they accrue, supported by a per-employee calculation tied to each contract, basic salary and start date. They will look for a provision on the balance sheet that reconciles to that underlying schedule, and for the monthly charge flowing through the profit and loss.

What raises questions is the opposite: no provision, no schedule, and gratuity appearing only as lump-sum payments in the years people happened to leave. That pattern suggests the accounts have not captured a real obligation, and it invites more scrutiny, not less.

We maintain records to an audit-ready standard throughout the year rather than tidying them at year-end, which is what turns audit preparation into a review rather than a reconstruction.

What happens to your corporate tax position when gratuity is accrued properly

The UAE applies corporate tax at 9% on net profit above AED 375,000 for financial years starting on or after 1 June 2023, per the Federal Tax Authority. Below that threshold the rate is 0%.

A properly recognised end-of-service provision reduces accounting profit in the year the gratuity is earned, because the cost is booked when the obligation arises rather than years later at payout. In principle, that means the company accruing monthly recognises the expense in the correct period, which can affect taxable profit in that period rather than deferring it all to the year of settlement.

Whether, and to what extent, a provision is deductible for corporate tax depends on how it is measured and on the FTA's rules for provisions, so treat this as a position to establish with your accountant for your specific accounts, not a guaranteed tax saving. The broader truth still holds: the company that books gratuity as it is earned is presenting a more accurate, more defensible tax position than the one that ignores it until payout.

Fixing accounts that have never carried a gratuity liability

If nobody has been accruing gratuity, your last few accounting periods almost certainly understate your liabilities, and they need correcting before they will stand up to a bank or an FTA review. This is common, and it is fixable.

The cleanup runs roughly like this:

1. 1Build a per-employee schedule from each contract, basic salary and start date.
2. 2Calculate the gratuity accrued to date under the Federal Decree-Law No. 33 of 2021 formula.
3. 3Recognise the provision and correct the affected periods so the balance sheet reflects the real obligation.
4. 4Switch to a monthly accrual from that point forward, so it never falls behind again.

How much work this is depends on your headcount and how far back the records go, which is exactly what we assess at the start of an engagement. If the cleanup is substantial, we tell you up front what it will take rather than absorbing it quietly and surprising you later. You can get that assessed and priced in one free call before you commit to anything.

How OMC keeps your end of service liability audit-ready every month

We run bookkeeping to an audit-ready standard for businesses across the UAE, and a monthly gratuity accrual is part of that discipline, not an add-on. Each month we update the provision for every eligible employee, reconcile it to the underlying schedule, and reflect it in the reports you actually use to make decisions.

Since 2007 we have supported 1,400+ companies, and the accounting relationship covers the whole compliance layer: bookkeeping, VAT, corporate tax registration and filing, payroll and end-of-service accruals, all through one team. That matters when a bank or the FTA asks for records, because the numbers already reconcile.

Get your exact price and the fastest route to clean, audit-ready accounts in one free call, no obligation. → Get my quote

Frequently asked questions

How is end of service gratuity calculated in the UAE?

Under UAE Federal Decree-Law No. 33 of 2021, gratuity is 21 days of basic salary for each of the first five years of service and 30 days of basic salary for each year beyond that, based on the employee's last basic salary and capped at two years' pay. The exact figure depends on the contract, which we confirm in a review.

Should gratuity be recorded monthly or only when an employee resigns?

Gratuity should be accrued monthly for every eligible employee from their start date, not booked only at resignation. Recording it only on departure understates your liabilities and distorts the year's profit when settlements fall due. A monthly accrual keeps the balance sheet accurate and makes each departure a payment from a provision you already funded.

Does a gratuity accrual reduce my corporate tax?

Recognising gratuity as it is earned books the expense in the correct period, which can lower accounting profit in that year rather than deferring it to payout. Corporate tax is 9% on net profit above AED 375,000 per the Federal Tax Authority. Whether a provision is deductible depends on the FTA's rules, so establish this with your accountant.

What does an auditor expect to see for end of service benefits?

An auditor expects a provision on the balance sheet supported by a per-employee schedule tied to each contract, basic salary and start date, with the monthly charge running through the profit and loss. Gratuity appearing only as lump-sum payments in years when staff left, with no provision, is what prompts further questions.

What if my accounts have never shown a gratuity liability?

Then your recent accounts likely understate your liabilities and need correcting before a bank or the FTA review them. We build a per-employee schedule, calculate the accrued liability, correct the affected periods, and switch you to a monthly accrual going forward. The scope depends on your headcount and history, which we assess and price up front.

Does gratuity apply to employees on a limited or unlimited contract?

Under Federal Decree-Law No. 33 of 2021, UAE employment now runs on fixed-term contracts, and end-of-service gratuity applies to eligible employees who complete the qualifying service period. The precise entitlement depends on length of service and the contract terms, so we confirm each employee's position against their actual contract rather than assuming a default.

Is gratuity payable if an employee is dismissed?

Gratuity entitlement on termination depends on the length of service and the grounds for ending employment under Federal Decree-Law No. 33 of 2021, and specific circumstances can affect it. Because the outcome turns on the facts of each case, we check the position against the contract and the reason for termination rather than asserting a blanket answer.