A guide to payroll services in Dubai

Effective payroll management is a vital component of any successful business operating in Dubai. This process goes beyond merely issuing paychecks. It encompasses a range of critical activities, including tracking employee hours, managing leave, gratuity payments and tax obligations, and ensuring strict compliance with the UAE’s labour laws.

Unfortunately, in Dubai the process can be fraught with challenges. Specific regulations and compliance requirements in the region add layers of complexity which can often lead to costly errors and inefficiencies.

This is where the use of specialised payroll services comes into play. By outsourcing this critical function, businesses can navigate the complexities of payroll management more efficiently. Payroll services offer expertise in local regulations, streamline processes, and ensure accuracy and timeliness in employee payments.

This guide provides an overview of payroll management in Dubai, highlighting common challenges faced by businesses and illustrating how payroll services can be a strategic solution to these problems.

Understanding Payroll in Dubai

Payroll refers to the total amount of wages, salaries, bonuses, and deductions paid to employees by a company during a specific period. In the context of business operations, payroll is a crucial financial function that involves calculating and distributing compensation to employees, ensuring compliance with legal regulations and internal policies.

Effective payroll management goes beyond merely disbursing salaries; it encompasses various elements such as tax deductions, social security contributions, and adherence to employment laws. It serves as a comprehensive system to accurately compensate employees while fulfilling legal obligations.

Key components of payroll services

Calculating salaries and deductions

At the core of payroll services lies the intricate task of calculating salaries, ensuring that employees receive fair compensation encompassing basic pay, bonuses, and allowances while simultaneously managing various types of deductions to guarantee precise financial transactions.

In the United Arab Emirates, deductions from an employee’s wage fall into two primary categories: Mandatory Deductions and Voluntary Deductions.

Mandatory Deductions: These are essential withholdings from an employee’s paycheck, dictated by legal obligations. In the UAE, mandatory payroll deductions may include contributions for health insurance and other obligations such as:

• Deductions related to court-ordered payments or judgments against specific employees.
• Payments directed by court orders for specific financial obligations.
• Contributions towards child support as mandated by legal requirements.

Voluntary Deductions: On the other hand, voluntary deductions are payments that an employee chooses to make, and both the employer and employee agree upon. Examples of voluntary payroll deductions in the UAE include:

• Voluntary payments towards health insurance coverage.
• Employee-requested advances on salary.

For each voluntary payroll deduction, explicit written authorisation from the employee is a prerequisite before processing. This authorisation includes details such as the employee’s name, date, and the reason behind the voluntary deduction. This practice is considered standard across businesses in the region.

Leave management and benefits

Beyond the numbers, payroll services extend to managing employee leave, benefits, and allowances. This includes overseeing various types of leave, administering benefit programmes, and ensuring timely and accurate entitlements for employees.

Streamlining WPS payments

Companies must ensure compliance with the Wage Protection System (WPS), an electronic salary transfer system that allows companies to pay workers via banks, bureaus, and financial institutions approved by the UAE Central Bank. The WPS monitors and documents the wage payment process, ensuring that salaries are paid in full and on time.

Gratuity Payments

End-of-service gratuity payments in Dubai are a form of severance pay that is mandated by UAE labour law for employees who have completed at least one year of continuous service with an employer. This gratuity is calculated based on the employee’s basic salary (excluding housing, transport, and other allowances) and the length of their service.

The general formula for calculating the end-of-service gratuity is as follows:

• For the first five years of service, the employee is entitled to 21 days’ basic salary for each year of service.
• For each year of service beyond the first five years, the employee is entitled to 30 days’ basic salary.

The total gratuity should not exceed the equivalent of two years’ basic salary. It’s important to note that if an employee resigns before completing five years of service, the gratuity amount is reduced. It’s also worth mentioning that there are different rules for calculating gratuity for different types of employment contracts (limited or unlimited) and in cases of dismissal or resignation under specific circumstances.

This gratuity is due upon termination of employment, whether by resignation, retirement, or dismissal, and is an important financial right for employees working in Dubai.

Tax landscape

A distinctive feature of payroll services in the UAE is the absence of personal income tax on employee salaries. However, businesses must manage other tax-related obligations, such as Value Added Tax (VAT), corporate tax and social security contributions.

Managing Payroll in Dubai: A Comprehensive Guide

Managing payroll in Dubai demands a systematic approach that adapts to various business preferences, whether it be automated solutions, software payroll systems, manual computations, or outsourced processing. The following steps encompass the fundamental responsibilities and procedures typically associated with payroll management in Dubai:

Step 1 – Maintain employee master files: Ensuring accurate and up-to-date employee master files is foundational. Essential details such as basic salary, designation, allowances, and contact information must be diligently maintained. Regular updates are crucial, especially when there are changes in wages or job roles.

Step 2 – Calculate gross wages: Before the end of each pay period, a meticulous computation of gross wages is imperative. The process involves summing up the basic salary and allowances and creating a comprehensive record in the payroll system.

Step 3 – Compute overtime pay: For employees working overtime, the calculation involves two categories: normal overtime and Friday overtime. The formula considers factors like salary, days worked, and hours, ensuring accurate compensation for additional hours put in.

Step 4 – Add additional allowances: Many employees in the UAE receive extra allowances such as sales commissions, bonuses, and car expenses. Employers must incorporate these allowances into the employee’s salary for the corresponding pay period.

Step 5 – Calculate salary deductions: Various deductions, including violations, absences, and fines, are subtracted from the basic or gross wages. Calculating these deductibles provides clarity on the net salary, considering all necessary adjustments.

Step 6 – Generate salary statements and pay slips: At the conclusion of each pay period, a summary report or salary statements are prepared, encompassing components like basic salary, payroll deductions, absences, overtime, and allowances. Individual pay slips are generated for employees, serving as detailed records of their monthly earnings and deductions.

Step 7 – Create a WPS SIF file: The final step involves creating a WPS (Wages Protection System) SIF (Salary Information File). This file, mandated by the government, follows a specific format defined by the Ministry of Labour.

How can Global Link help?

Global Link has over 16 years’ experience working with local and global businesses, providing bespoke consultancy services for company incorporation in Dubai and the wider UAE.

We can assist your company with payroll management, guaranteeing precise and compliant financial transactions, optimising tax obligations, and ensuring timely disbursement of employee salaries so that you can focus on core business activities without the burden of payroll complexities.

If you need advice on our PRO services or any other aspect of company incorporation or visa acquisition, please get in touch with us on +971 4 553 9901 or email us at [email protected] and we will be happy to assist you.