Gratuity and end of service benefits: how to account for and fund them as an employer

Most owners only think about gratuity on the day an employee resigns. By then it is too late to plan for, you either have the cash or you do not. The businesses that get caught out are almost always the ones that treated gratuity as a one off payment instead of a liability that has been building since the employee’s first year.

Here is how the calculation works, and why it belongs on your balance sheet every month, not just at exit.

The calculation basis

UAE end of service gratuity is based on basic salary only. Housing allowance, transport allowance, and any other allowances are excluded from the calculation, no matter how large a share of the total package they represent. This is one of the most common payroll mistakes we see, companies calculate gratuity on gross salary and either over or underfund the liability as a result.

The formula, under Federal Decree-Law 33 of 2021:

Years of service	Gratuity per year
Under 1 year	Not entitled
Years 1 to 5	21 days’ basic salary per year
Beyond year 5	30 days’ basic salary per year
Total cap	2 years’ total basic salary

Daily basic salary is calculated as basic salary divided by 30. So an employee on AED 15,000 basic salary who completes 7 years of service accrues 21 days per year for the first 5 years, then 30 days per year for years 6 and 7, roughly AED 52,500 for the first stretch and AED 30,000 for the last two years, for a total around AED 82,500. The exact figure depends on the precise service dates and any unpaid leave taken.

A few details that change the outcome and get missed often:

• Resignation versus termination makes no difference. Since the 2021 law reform, an employee who resigns after at least one year of service receives the exact same gratuity as one who is terminated without cause. There is no reduced payout for resigning, as there was under the older labour law.
• Unpaid leave is subtracted from service time. If an employee takes 60 days of unpaid leave during a 3 year tenure, those 60 days come out of the period used to calculate gratuity. If your payroll system is not tracking unpaid leave against tenure accurately, your provision will drift from the real liability.
• DIFC and ADGM are different. These two free zones replaced lump sum gratuity with mandatory workplace savings schemes, DEWS in DIFC, a similar scheme (GCEN) in ADGM, funded by monthly employer contributions rather than an accrued liability. Service before February 2020 in DIFC is still settled under the old gratuity rules. Every other free zone and the mainland follow the standard formula above.

Why gratuity should be a monthly provision, not a year end shock

Here is the part that catches employers off guard: the liability exists from year one, whether you have set money aside for it or not. Every payroll cycle, every employee with more than a year of tenure is quietly earning gratuity days. If you only calculate the number when someone actually resigns, you are not managing a cost, you are discovering one.

The practical failure mode looks like this. A company grows fast, hires a handful of senior staff in year one, and three years later two of them leave within the same quarter. If gratuity was never provisioned, that is a five or six figure cash outflow landing in a single month, with no warning in the accounts beforehand. The business was profitable on paper the whole time, the liability was simply invisible.

The fix is straightforward: calculate the accrued gratuity liability for every eligible employee monthly, based on their current basic salary and service to date, and post it as a provision in your financial statements. As basic salaries increase or employees cross the 5 year threshold into the higher accrual rate, the monthly provision adjusts. When someone actually leaves, you are paying out of a liability that has already been recognised, not discovering a new expense.

This also protects you from a second, quieter risk: if basic salary rises significantly over an employee’s tenure, the gratuity calculation uses the final basic salary at the point of leaving, applied across all their years of service. A long tenured employee who received meaningful raises can accrue a materially larger gratuity liability than their historical salary would suggest. A provision that is recalculated periodically catches this drift, a provision calculated once and left untouched does not.

How gratuity interacts with payroll and financial statements

Gratuity is not just an HR calculation, it touches three places in your accounting at once:

• Payroll records need accurate basic salary (separated from allowances) and precise service dates, including unpaid leave, for every employee, because those are the exact inputs the formula uses.
• The balance sheet carries the accrued gratuity liability as a provision, and under IFRS this needs to reflect current basic salaries, not historical ones, if you want the figure to be realistic rather than nominal.
• Cash flow planning should account for the fact that gratuity is typically settled in a lump sum at the point an employee leaves, so a company with several long tenured staff should be thinking about funding, not just recognising the number.

For companies preparing audited financial statements, an unprovisioned or inconsistently calculated gratuity balance is a common audit finding, auditors will ask how the figure was derived and whether it reconciles to actual payroll and service records.

We build gratuity provisioning into monthly bookkeeping and payroll for our clients, so the balance sheet reflects the real liability every month, not a guess at year end, priced at fixed rates.

Talk to us, the initial consultation is free.

As of July 2026. This article is general information and is no substitute for advice in an individual case. Gratuity outcomes depend on individual contract terms and service history, confirm exact figures with a qualified adviser before relying on them.

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