If you are a business owner in the UAE, then understanding payroll taxes and employer obligations is very crucial. While the UAE does not impose income tax on salaries, certain rules apply to companies in respect of employees. This includes contributions to social security, end-of-service gratuity, and the use of the Wages Protection System (WPS). This article outlines everything employers should know about payroll taxes in UAE, their obligations, and how FAR Consulting Middle East will help with full compliance with the updated laws and practices.
What Do Payroll Taxes Mean in UAE?
There is no income tax levied on personal salaries in the UAE. This makes the country attractive for both employers and employees. However, this does not mean payroll is tax-free for businesses. Employers must fulfill several payroll obligations according to UAE labor laws, such as social security contributions, end-of-service gratuity, and the Wages Protection System (WPS).
Who Pays Payroll-Related Contributions in UAE?
Depending on the nationality and location of the employee, the responsibility for payroll-related contributions may differ:
- UAE and GCC national employees: UAE and GCC nationals must be registered with the General Pension and Social Security Authority (GPSSA) or other relevant authorities under the law and make contributions along with the employer.
- Expatriates: Expatriates are not subject to social security contributions, except for end-of-service benefits provided by the employer and compliance with WPS and other labor regulations.
- DIFC employees: DIFC employees are covered under the DIFC Employee Workplace Savings (DEWS) plan as an alternative to the traditional gratuity schemes.
Key Payroll Obligations for UAE Employers
Employers in the UAE shall be liable for meeting the following payroll conditions:
- Registration with the appropriate authorities (GPSSA, DEWS).
- Monthly salary payments in the Wage Protection System (WPS).
- Maintain transparent payroll records and issue payslips.
- Calculate statutory benefits like annual leaves, sick leaves, and end-of-service gratuity.
- Making sure that payroll procedures are in compliance with Federal Decree-Law No. 33 of 2021 and the amendments thereafter.
Any defaults on these obligations may attract legal penalties and damage the image of the company.
Understanding Contributions to Social Security of UAE and GCC Nationals
The General Pension and Social Security Authority (GPSSA) sets the regulations for social security contributions for nationals of the UAE and the GCC. These contributions will be payable monthly as follows:
- For employees: 11% of the contribution salary.
- For employers: 15% of the contribution salary.
- For the government: For Emiratis who work in the private sector and earn under AED 20,000, the government will pay 2.5% for the employer.
These contributions are obligatory and have to be paid to the GPSSA on a monthly basis. These contributions, however, are not applicable to the expatriates.
What Is End-of-Service Gratuity, and Who Is Eligible?
As per the UAE Labour Law, workers in the private sector are entitled to an end-of-service gratuity upon completing a minimum of one year of continuous service, except for those employees who work under DIFC and ADGM regulations. The gratuity shall be calculated as follows:
- 1 to 5 years of service: 21 days of basic wage for every year of service.
- More than 5 years: 30 days’ basic wage for each additional year beyond five
- Maximum cap: The total gratuity payment shall not exceed 2 years’ total salary.
The gratuity will, however, be computed using the employee’s basic salary alone and not bonuses and allowances.
DEWS Contributions in DIFC (Dubai International Financial Centre)
Complying with DIFC Employment Law No. 2 of 2019, as amended, employers are obliged to contribute, on a monthly basis, to a Qualifying Scheme for purposes of the DIFC Employee Workplace Savings (DEWS) Plan. The rates for making contributions are as follows:
- For employees with a period of up to 5 years’ service: 5.83% of basic salary
- For employees with a period in excess of 5 years ‘service: 8.33% of basic salary
How the Wages Protection System (WPS) Works in the UAE
The Wages Protection System (WPS) is the electronic payment method of salaries regulated by the government-MOHRE. All private sector employers need to:
- Transfer employee salaries through designated banks or exchange houses.
- Pay salaries, at the latest by the 15th day of the succeeding month.
- Submit accurate payroll data on time to avoid delays and penalties.
- Non-compliance with the WPS may attract hefty fines, suspension of work permits, and restrictions on hiring of new employees.
What Benefits Must Employers Provide Under UAE Law?
According to the labor laws of the UAE, the employer gives various statutory benefits, including:
- Annual Leave: 30 calendar days after one year of service.
- Sick Leave: 90 days in a year (15 days full pay, next 30 days half pay, remaining without pay).
- Maternity Leave: 60 days (first 45 days full pay, remaining 15 days half pay).
- Parental Leave: 5 working days to either parent.
- Bereavement Leave: 3 to 5 days, depending on the relationship.
- Study Leave: 10-day leave yearly after two years of service.
- Unemployment Insurance: The worker is required to pay the insurance premium for a basic insurance package as per the categories mentioned below.
- First category – If the worker’s basic salary is less than 16,000 AED, then the premium is no more than 5 AED per month.
- Second category – If the worker’s basic salary is more than 16,000 AED, then the premium is no more than 10 AED per month.
- Workers on commission-based pay (a percentage of sales or profits) may choose either subscription category if their basic salary is not defined in the employment contract.
- Health insurance: Mandatory in Dubai and Abu Dhabi.
How to Calculate Payroll Components in UAE
Components of a typical payroll structure would include:
- Basic Salary: As mentioned in the employment contract.
- Allowances: such as housing allowance, transport allowances, or utility allowances.
- Overtime Pay: Anyone working beyond the normal hours earns an extra basic wage of 25% or 50% between 10 PM and 4 AM, excluding shift workers. Work performed on a rest day will earn a substitute rest day or an extra 50% on the basic wage.
- Deductions—pension contribution and unemployment insurance or any other authorized deduction.
- End-of-Service Benefits —calculated independently considering the duration of employment and eligibility.
Employers must keep good records and ensure transparency in the payroll calculations.
Payroll Compliance in Mainland vs. Free Zones
- Mainland companies strictly need to follow MOHRE regulations and WPS compliance.
- Free zones may have their own employment regulations. For instance, DIFC uses the DEWS scheme, while other zones may follow practices from MOHRE.
FAR Consulting assists businesses with compliance, whether they are operating in the mainland UAE or across several free zones.
Is There a Payroll Withholding Tax in the UAE?
The UAE levies no payroll withholding tax or personal income tax from any of its employees. Thus, employees are paid their net salary in full, and tax on income is not deducted at the source.
How Corporate Tax Affects Payroll Expenses
The UAE imposed a corporate tax of 9% on profits above AED 375,000, effective 1st June 2023. There is no payroll tax; however, expenses such as wages, benefits, and end-of-service payments are deductible in calculating taxable income (business profits) provided they are for business purposes and are properly documented.
Does VAT Apply to Payroll in the UAE?
No, salaries paid to employees are not subject to Value Added Tax (VAT). Should any employee benefits (for example, accommodation or transportation) be considered a taxable supply, VAT may become applicable. It is advisable for employers to seek an expert’s advice in order to correctly apply VAT to any benefits in kind.
What Happens If You Don’t Comply with UAE Payroll Rules?
Failure to comply with payroll regulations, the penalties may include:
- The penalties caused by a WPS system.
- Suspended work permits.
- Legal liability from employees.
- Rulings by the MOHRE for disputes with an amount less than AED 50,000.
- Damage in reputation and finances to the employer.
Timely compliance is very important to avoid legal and operational risks.
Why FAR Consulting Middle East Is Your Trusted Payroll Partner
As experts in payroll compliance in the UAE, FAR Consulting Middle East offers services that include the following:
- WPS-compliant salary processing
- Gratuity and leave calculations
- Social Security submissions
- Custom payroll reports
- Integration with HR and accounting systems
- Regulatory updates and compliance checks
Grow your business while we take care of your payroll.
FAQs: Payroll Taxes and Employer Obligations in the UAE
Q1. Do I need to pay income tax on my salary in the UAE?
No. In the UAE, personal income tax has not been levied on individuals. Employees receive their full salary without any income tax deductions.
Q2. Does Social Security cover expatriates?
No. Social security contributions in the UAE apply only to UAE and GCC nationals. Expatriates are exempt from these contributions.
Q3. What would be the penalty for delayed WPS salary transfer?
Delayed salary payments through the Wages Protection System (WPS) can result in:
- Fines imposed by the Ministry of Human Resources and Emiratisation (MOHRE)
- Suspension of WPS access.
- Restrictions on the work permit, as well as possible investigation by MOHRE.
Q4. Is end-of-service gratuity mandatory?
Yes, the end-of-service gratuity is something that is mandatory under the UAE Labor Law, and it applies to every employee who is not part of the DIFC Employee Workplace Savings (DEWS) scheme. The gratuity is based on his or her basic salary and the number of years worked.
Q5. Is payroll deductible under corporate tax?
Yes. Salaries, end-of-service benefits, and all related employer contributions qualify as allowable business expenses and can therefore be claimed under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022).
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