Annual Leave Encashment UAE: Accrual, Leave Salary and the Year-End Provision

Annual leave encashment in the UAE is paid at basic salary ÷ 30 × unused accrued days. Leave encashment in the UAE is mandatory for any accrued leave the employee never took, settled inside the final settlement within 14 days of employment ending under Federal Decree-Law No. 33 of 2021. Allowances stay out of the calculation unless the contract says otherwise.

Annual leave UAE accrual sits alongside gratuity as one of the payroll errors we correct most often in UAE SMEs. Federal law is clear: 30 calendar days a year after one year of service, two days a month between six and twelve months. The operational implementation is where SMEs slip — accrual posting, balance-sheet provisioning, encashment on departure, and the documentation an inspector actually asks for.

This guide is for founders, HR managers and finance directors of UAE SMEs setting annual-leave policy and posting leave accruals through payroll. It covers what Federal Decree-Law No. 33 of 2021 requires, how to post the accrual, how to calculate the year-end provision, and how to encash unused leave when someone leaves.

Start with the 30-day rule

Article 29 of Federal Decree-Law No. 33 of 2021 sets the baseline. Every private-sector employee in the UAE, on a full-time permanent contract, is entitled to 30 calendar days of paid annual leave per year after completing one year of continuous service. Between six months and one year, the entitlement accrues at two days per month. Below six months, there is no statutory entitlement. The annual leave meaning under the law is specific: paid days off earned through continuous service — a separate entitlement from sick, maternity, parental, bereavement or compassionate leave.

The 30 days are calendar days, not working days — weekends falling within the leave window count toward the 30 days. Under Article 29(7), public holidays that fall within annual leave are also counted as part of the leave by default, so they consume the balance unless the employment contract or the establishment’s regulations are more favourable to the employee. Many employers do apply a more generous policy that excludes public holidays from the count, so the operative rule is whichever is more favourable — check your own contract and policy rather than assuming.

The accrual base for encashment is basic salary, calculated as basic ÷ 30 = daily rate. Allowances (housing, transport, education) may be included by contract but the federal minimum is basic only. Because annual leave in UAE is measured against basic salary rather than the full package, getting the accrual base right at the outset is what keeps the year-end provision defensible.

Article 29 clause by clause — the whole annual leave rule in one table

Almost every annual-leave dispute in a UAE workplace turns on one of ten clauses. The consolidated English text published by MoHRE sets them out in order, and reading them together removes most of the guesswork about what an employer may and may not do with a leave balance.

Two of those clauses are load-bearing and routinely misread. Article 29(4) requires notice of “not less than a month” before the employer-set leave date, which is why the 30-day notice figure appears in every UAE HR policy. And Article 29(8) means an employer cannot simply refuse leave until a balance quietly ages out — the worker either takes it, carries it forward or receives a cash allowance.

Who is entitled to annual leave in the UAE

Annual leave in the UAE is not limited to the standard full-time employee, though the flat 30-day figure is. Under the work models set out in Federal Decree-Law No. 33 of 2021, part-time, temporary and flexible-contract staff also earn paid annual leave, but in proportion to the hours they actually work rather than a full 30 days. A part-timer contracted for half a full-time week builds leave at roughly half the rate, so the payroll system should hold the contracted hours and pro-rate the accrual on its own.

Probation does not switch the accrual off. Leave builds from the first day of employment, and the six-to-twelve-month rate of two days a month applies during and after probation alike — an employee who leaves in month nine is still owed encashment on the days accrued to that point.

Domestic workers — housemaids, drivers, private cooks — sit under a separate domestic-workers law rather than Decree-Law 33, with their own leave provisions, so a household employer should not read across from the private-sector rules. For company payroll, the models above are what your payroll and WPS processing needs to reflect.

Posting the accrual each month

The clean payroll posting accrues annual leave monthly rather than at year-end. The accrual rate is 30 days ÷ 12 months = 2.5 days per month for employees past their first year, and 2 days per month for employees between six and twelve months of service.

The payroll journal each month posts:

• Debit Employee Costs - Leave Accrual (P&L)
• Credit Provision for Annual Leave (Balance Sheet)

The amount is the daily rate of basic salary multiplied by the days accrued that month. For an employee earning AED 6,000 basic, the monthly accrual is (6,000 ÷ 30) × 2.5 = AED 500.

When leave is taken, the payroll entry reverses the relevant portion of the provision against the cash payment of wages — the P&L cost was already recognised when the accrual was posted.

When leave is encashed on departure, the provision is settled against the final-settlement payment. The provision should equal the encashment to within a reasonable margin; any difference flows through the final settlement P&L.

Carry-forward, caps and when to force leave

Article 29(5) permits carry-forward by mutual agreement. In practice most UAE SMEs cap carry-forward at the current-year entitlement (30 days) to avoid balances becoming unmanageable. The HR policy should set a maximum carry-forward — 30 days, equivalent to one year’s entitlement, is the usual figure. It should say what happens above the cap: balances over it at year-end are either encashed at basic salary or forfeited by mutual agreement, though forfeiture has to be documented and is rare in practice. And it should confirm that the employer can require an employee to take leave to bring balances down, giving 30 days’ notice under Article 29(4).

A 30-day cap with monthly accrual gives the SME visibility. The leave register flags employees approaching the cap two or three months out, so the manager can schedule the leave or arrange encashment while there’s still time to act. Without a cap, leave accumulation goes unchecked — balances drift into a second and third year’s worth of entitlement, the year-end provision balloons, and encashment on departure turns into a cash event nobody budgeted for. That last one tends to surprise founders the most.

There is a statutory number underneath the policy number, and it is the one HR policies most often miss. Article 19(1) of the Executive Regulation issued by Cabinet Resolution No. 1 of 2022 provides that the worker “may carry forward not more than half of the annual leave to the following year, or they may agree with the employer to receive a cash allowance in lieu thereof, according to the wage they receive at the time of their entitlement to the leave”. For a standard 30-day entitlement, the carry-forward the worker can insist on is therefore 15 days, with the rest either taken or converted to a cash allowance by agreement.

An employer policy that is more generous than the statutory half — the 30-day cap many UAE SMEs run — is permitted, because Article 29(7) and the Decree-Law’s general approach preserve any contractual or establishment rule that is more favourable to the worker. What is not permitted is a policy less generous than the half-year carry-forward the Executive Regulation gives, or one that quietly forfeits accrued days.

Leave encashment in the UAE on departure — the leave-salary calculation

Article 29(9) requires unused annual leave to be encashed on departure — what most UAE employees and payroll clerks call “leave salary”. It’s calculated separately from, and paid alongside, end-of-service gratuity, and the two together make up the bulk of a final settlement. The calculation:

• Daily rate = basic salary ÷ 30
• Encashment = daily rate × unused accrued leave days

For an employee with AED 6,000 basic salary and 15 unused days, the encashment is 6,000 ÷ 30 × 15 = AED 3,000.

The encashment is included in the final settlement which must be paid within 14 days of the end of employment under Federal Decree-Law No. 33 of 2021. Late payment triggers MoHRE penalties and potential tribunal exposure.

The payroll register should show the encashment calculation clearly — opening balance, accruals to date of departure, leave taken in the final period, closing balance, daily rate and encashment amount. Auditors and MoHRE inspectors look at this calculation specifically.

A common error here is encashing on total package rather than basic salary. It overstates the payout by the whole allowance element of the package, and worse, it sets a precedent the next departing employee will point to. The federal minimum is basic only — Article 29(9) of Federal Decree-Law No. 33 of 2021 says the leave wage for the balance “shall be calculated according to the basic wage”, and Article 19(2) of the Executive Regulation in Cabinet Resolution No. 1 of 2022 repeats it. Total package applies solely where the contract spells it out.

Annual leave encashment calculation UAE — a resignation worked example

The annual leave encashment calculation UAE employers get asked about most is the mid-year resignation, where leave has part-accrued and part-been-taken. The method is the same as any leave salary calculation UAE payroll runs: work out the days accrued to the leaving date, subtract the days already taken, and pay the balance at basic salary ÷ 30.

Take an employee on AED 9,000 basic who resigns seven months into the leave year, past their first year of service and so accruing 2.5 days a month. Accrued to date: 7 × 2.5 = 17.5 days. They took five days in the period, which leaves 12.5 unused. Daily rate: 9,000 ÷ 30 = AED 300. Encashment: 12.5 × 300 = AED 3,750.

That figure joins the end-of-service gratuity in the final settlement, and the two are the numbers a departing employee checks first. For the gratuity side of the same settlement, see our gratuity calculator and end-of-service formula guide. Show the working on the payslip — opening balance, accrual, days taken, closing balance, daily rate, amount — because an unexplained round number is exactly what invites a labour claim.

Leave salary calculation UAE — pay during leave versus encashment

The phrase “leave salary” carries two meanings, and the leave salary calculation UAE staff ask about depends on which one they have in mind. The first is the wage paid while an employee is away on annual leave: they keep drawing their normal salary, because annual leave is paid leave under Article 29. The second is leave encashment — the cash paid for accrued days the employee never took, settled on departure.

The two are worked out differently. Pay during leave is simply the employee’s ordinary wage for the period, usually the full contractual amount with allowances included, since nothing has changed except that they are not at their desk. Encashment of unused days, by contrast, is set against basic salary as the federal minimum: basic ÷ 30 × unused days. Allowances only enter the encashment sum where the contract says so.

The confusion tends to surface at settlement. An employee who was paid their full package during earlier leave will query why unused days are encashed on basic alone. Spelling both figures out in the contract, and again on the payslip, settles the point before it turns into an argument.

The provision your auditor will ask for in December

The annual-leave provision at year-end is the cash cost of paying out every active employee’s unused accrued balance at the current daily rate of basic salary. That is the whole leave provision meaning — the liability for each employee’s accrued leave balance, earned but not yet taken or encashed.

For a 20-employee SME with average 12 days unused balance and AED 5,000 average basic salary:

• Provision = 20 × 12 × (5,000 ÷ 30) = AED 40,000

This sits as a current liability on the balance sheet and is updated monthly as accruals and usage move. For audited SMEs, this is a standard year-end audit area — auditors will request the leave-balance register, sample-test the calculation for a selection of employees and check the provision movement against the prior year.

Excel-run payroll tends to understate this provision, and the reasons are always the same four:

• Leave taken is captured but leave accrued is not.
• Accruals during sick or maternity leave are suspended in error.
• The carry-forward balance is not updated systematically.
• The daily-rate calculation uses total salary rather than basic, or vice versa, depending on which way the error runs.

A clean outsourced payroll produces the provision as a routine year-end output, with the supporting workpapers ready for the auditor.

Sick leave, maternity and unpaid leave — what keeps accruing

On sick leave, annual leave continues to accrue during the 15 days at full pay and the 30 days at half pay (Article 31), but not during the following unpaid period (up to the 90-day annual maximum). Maternity leave keeps accruing throughout the 60-day entitlement — 45 days full pay plus 15 days half pay — under Article 30. Unpaid leave is the exception: nothing accrues during a sabbatical, unpaid personal leave or unpaid hajj leave.

A common error is to suspend all accruals during any leave window. That understates the year-end provision and produces a recurring audit adjustment.

The Decree-Law also grants shorter paid leaves that payroll should track as separate categories — parental leave of five working days for each parent within six months of the child’s birth, and bereavement leave of five days on the death of a spouse or three days for a parent, child, sibling, grandchild or grandparent, both under Article 32. Compassionate leave is the umbrella term staff commonly use for the bereavement entitlement; the law itself does not use the phrase. Whatever you call them, track these outside the annual-leave balance — they are separate entitlements, not deductions from the 30 days.

The statutory basis for the accrual distinction is worth stating plainly, because it is where the payroll rule actually comes from. The Decree-Law does not say in terms that annual leave accrues during paid leave. What it does is exclude specific unpaid periods from the service term.

Article 33(2) says unpaid leave “shall not be included in the worker’s service term at the employer or in the period of the contribution in the retirement scheme”. Article 30(2) says the same of the further period of up to 45 continuous or intermittent unpaid days a female worker may take after maternity leave for sickness of herself or her child arising from pregnancy or childbirth — that period “is not included within the service term”. Since annual leave under Article 29(1)(a) is earned against the service term, periods carved out of it stop the accrual and periods left inside it do not.

Article 31 also carries two conditions payroll teams forget. Under Article 31(2), a worker has no entitlement to paid sick leave during the probationary period, although the employer may grant unpaid sick leave on a medical report. And under Article 31(1), the worker must inform the employer within three working days and produce a medical report from the medical entity — an absence that fails that test is not protected sick leave at all, which changes how the day is coded in payroll.

A worked leave-balance register for a UAE SME

The register is the document everything else is built on, so it is worth seeing one populated rather than described. The table below runs six employees of a Dubai SME through a leave year: opening balance carried in, days accrued at the Article 29 rate, days taken, closing balance, and the encashment value of that balance at basic salary ÷ 30. The AED figures are illustrative salary inputs used to show the arithmetic, not market rates.

Row B is the one a founder should look at hardest. An employee on AED 12,000 basic who never books leave builds a balance that is worth more per day than anyone else’s, and under Article 29(8) the employer cannot let it age out — the days must be taken, carried forward within the Executive Regulation’s half-year limit, or converted to a cash allowance. Row C shows why a mid-year joiner contributes nothing to the provision until they pass six months: there is no statutory entitlement below that point. Row F is the resignation worked earlier in this guide, sitting in the same register so the encashment reconciles to the provision rather than being calculated separately.

Three checks make the register audit-ready. Reconcile the closing balance to the payroll system rather than to the HR spreadsheet. Date-stamp any balance carried forward, because Article 19(1) of the Executive Regulation prices the cash allowance at the wage in force when the leave was earned. And keep the accrual rate column visible, because the single most common error in a UAE SME register is a first-year employee accrued at 2.5 days per month instead of 2.

When MoHRE knocks

A standard MoHRE inspection touching annual leave requests:

• Leave-balance register for every active employee showing opening balance, accruals, usage and closing balance for the period under review.
• Signed leave applications for every leave taken in the past 12 months — date of application, leave dates, approval signature.
• Final-settlement calculations for departed employees in the past 24 months showing encashment of unused leave at basic salary.
• Year-end provision supporting the leave liability on the balance sheet.
• HR policy document showing carry-forward rules, accrual rates and approval workflow.

A clean outsourced payroll produces this pack as a standing report; an Excel-run payroll has to reconstruct it from scratch while the inspector waits.

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The leave-balance register is the single most-revealing document about a payroll function’s quality. A clean register reconciles to the day; a broken register has gaps, wrong rates and unexplained balances. Both auditors and MoHRE inspectors know where to look first.

DIFC, ADGM and other free zones

Free-zone employers operating under their own employment regulations may apply different annual-leave rules.

• DIFC Employment Law No. 2 of 2019 (as amended) — 20 working days annual leave (equivalent to 28 calendar days at a five-day working week, similar to federal).
• ADGM Employment Regulations 2024 — 20 working days annual leave with broadly similar accrual and encashment principles.
• DMCC, JAFZA and other free zones — typically follow federal law as the baseline with employer-discretion enhancement available.

If you operate across zones (a DIFC-licensed parent with a mainland operating company), apply consistent rules to avoid creating internal inequality. The federal baseline of 30 calendar days is the most generous in most cases.

Questions worth asking any payroll software

When shortlisting payroll software, three filters do most of the work:

1. Does it calculate the accrual monthly on basic salary at 2.5 days per month past one year, 2 days per month between six and twelve months, and zero below six months? If the answer is “annually” or “we just accrue 30 days on the anniversary date”, you will see inflated year-end provisions and incorrect mid-year encashments.
2. Does it handle the sick/maternity/unpaid distinction — accruing during paid sick and maternity but not during unpaid leave? “We suspend all accruals during any leave” is the wrong answer.
3. Does it produce the year-end provision as a single report — total leave days × daily rate × employee count? If you need to rebuild it in Excel each December, the auditor will find errors.

Same questions for an outsourced payroll provider. Test against your own employee data before committing.

How Velmont Crest helps

Velmont Crest’s UAE accounting specialists provide outsourced payroll processing for UAE SMEs including monthly leave-accrual tracking, encashment calculation on departure, year-end provision calculation for the balance sheet, and the supporting payroll-register evidence MoHRE inspectors and auditors expect.

The standard engagement covers monthly payroll processing, WPS or zone-specific submission, gratuity and leave-accrual tracking, payslip generation, and integration with the client’s accounting software (Xero, Zoho, QuickBooks). We coordinate with the client’s auditor on year-end provisions and with the client’s PRO for visa-related work. Scope and fees are agreed up front against your headcount and pay cycle — get a quote and we will size it on a free discovery call.

We are not a MoHRE-licensed PRO or visa-services agency. We are not a Federal Tax Authority registered tax agent.

If you’re setting up payroll this quarter

The federal rules are not complicated: 30 calendar days a year after one year of service, monthly accrual on basic salary, encashment on departure within 14 days, year-end provision on the balance sheet. The hard part is implementation discipline, not interpretation.

Three actions clean up most of the exposure:

1. Configure payroll to accrue monthly on basic salary at the correct rate (2.5 days past one year; 2 days between six and twelve months).
2. Set a carry-forward cap in the HR policy and enforce it through forced leave or encashment at year-end.
3. Calculate the year-end provision as a routine payroll output, with the supporting workpapers ready for the auditor.

For deeper coverage of related payroll topics, see our payroll outsourcing UAE buyer guide, our gratuity calculator and end-of-service formula guide — leave salary and gratuity are the two settlement figures departing UAE employees ask about most — our maternity leave UAE guide, our sick leave UAE employer policy, our MoHRE payroll compliance checklist and our accounting and bookkeeping service page.

Disclaimer: Velmont Crest is a DED-licensed accounting and advisory firm. We provide outsourced payroll processing, WPS submission support, leave-accrual tracking and year-end provisioning support for UAE businesses. We are not a Ministry of Human Resources and Emiratisation (MoHRE)-licensed PRO or visa-services agency, and we are not a Federal Tax Authority registered tax agent. Fees, regulatory requirements and leave-accrual rules change — verify the current position with the relevant authority and take advice from a licensed professional for matters specific to your circumstances.

References

• Federal Decree-Law No. 33 of 2021 on Employment Relations
• MoHRE — consolidated English text of Federal Decree-Law No. 33 of 2021 and its amendments, with Cabinet Resolution No. 1 of 2022 (Executive Regulation)
• UAE Ministry of Human Resources and Emiratisation (MoHRE)
• DIFC Employment Law No. 2 of 2019 (as amended)
• ADGM Employment Regulations 2024