Annual Leave Encashment UAE: Rules & Calculation

Leave encashment is one of the most common questions in a UAE final settlement — and one of the most common sources of disagreement. When an employee leaves a job with unused annual leave, they are entitled to be paid for those days in cash. The rules are clear in the law, but the calculation is where employers and employees often disagree: whether it's based on basic or full salary, how many days qualify, and how fractions of a year are handled.

This focused guide covers when encashment is allowed, how it's calculated, the carry-forward limits, why there's no tax on it in the UAE, what employers must do, and the disputes that come up most often — with worked examples.

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The legal basis

Annual leave and its encashment are governed by Article 29 of Federal Decree-Law No. 33 of 2021 (the UAE Labour Law) and Article 19 of Cabinet Resolution No. 1 of 2022 (the Executive Regulations).

The core entitlement: an employee who has completed one year of service is entitled to 30 calendar days of paid annual leave per year. An employee with more than six months but less than a year of service earns two days of leave per month. Leave begins accruing after six months of continuous service.

Article 29 also establishes the right to be paid for leave not taken when employment ends — the basis for all encashment on resignation or termination.

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When encashment is allowed

There are two distinct situations, and they work differently.

On termination or resignation (a statutory right). When employment ends — whether by resignation, dismissal, non-renewal, or mutual agreement — the employee has a statutory right to be paid in cash for every accrued but unused annual leave day. This is not at the employer's discretion. Article 29 is explicit that the worker is entitled to leave pay for the period not used, including fractions of the leave year in proportion to service. This payment forms part of the final settlement, alongside any gratuity owed.

During employment (by agreement). While still employed, annual leave is intended primarily as rest, so the default is that leave is taken, not cashed. Encashing unused days mid-employment is possible but is subject to mutual agreement and the employer's policy — there is no automatic right to demand annual encashment year after year. Many employers allow encashment of a carried-forward portion as a benefit, but they are not obliged to.

The practical distinction: on exit, encashment is the employee's right; during employment, it's a matter of policy and agreement.

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The calculation method

UAE leave encashment uses one formula, and the single most important rule is the salary base.

Encashment is calculated on basic salary only — not gross, not total package — unless the employment contract or company policy explicitly provides something more favourable. This is the most misunderstood point in the entire topic and the source of most disputes.

The standard formula:

Unused leave salary = (Basic monthly salary ÷ 30) × number of unused leave days

Dividing by 30 gives the daily rate of basic pay; multiplying by unused days gives the encashment amount. The same formula applies whether the leave is encashed on termination or, by agreement, during employment.

A note on terminology: while taking annual leave, some contracts pay leave salary on basic plus regular allowances (housing, transport). But for encashment of unused days, the statutory basis is basic salary only. If a contract is silent, basic salary is what applies.

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Maximum days and carry-forward

There is no separate statutory cap on how many accrued days can be encashed on termination — the employee is paid for all accrued unused days, including fractions of the final year.

What is capped is carry-forward during employment. Under Article 19 of Cabinet Resolution No. 1 of 2022, an employee may carry forward up to half of the annual leave entitlement (i.e. up to 15 of the 30 days) into the following year, or agree with the employer to encash that portion. Beyond that, employers may set a more generous policy, but cannot offer less than the statutory minimum.

MOHRE guidance is that annual leave cannot be indefinitely denied — leave generally cannot be withheld for more than two years unless the employee themselves requests to delay or encash it. In practice, accrued balances should not build up uncontrolled; they should be taken, carried forward within the limit, or settled.

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Worked examples

Example 1 — Resignation with unused leave. An employee with a basic salary of AED 9,000 resigns with 15 unused annual leave days. Daily rate = 9,000 ÷ 30 = AED 300. Encashment = 300 × 15 = AED 4,500, paid in the final settlement.

Example 2 — Termination, full year unused. An employee with a basic salary of AED 12,000 is terminated with a full 30 days accrued and unused. Daily rate = 12,000 ÷ 30 = AED 400. Encashment = 400 × 30 = AED 12,000 — effectively one month of basic salary.

Example 3 — Partial year (fractions). An employee with a basic salary of AED 6,000 leaves after 8 months of service in their second year, having taken no leave that year. Accrued days = 30 × (8 ÷ 12) = 20 days. Daily rate = 6,000 ÷ 30 = AED 200. Encashment = 200 × 20 = AED 4,000.

In every case, only basic salary enters the calculation unless the contract is more favourable.

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Tax implications: none

There is no personal income tax in the UAE, so annual leave encashment is not taxed. The employee receives the full calculated amount — no withholding, no deduction, no separate "encashment tax." (The UAE's corporate tax and VAT regimes apply to businesses, not to an individual's leave-encashment payment.) The gross encashment figure is the net amount the employee receives.

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Employer obligations

Employers carry several clear duties around leave encashment:

• Pay accrued unused leave on exit. Encashment of unused annual leave is part of the final settlement and must be paid, generally within 14 days of the end of the employment relationship.
• Use the correct salary base. Calculate on basic salary (or the more favourable contractual basis), not an arbitrary figure.
• Track accruals accurately. Maintain records of leave taken, carried forward, and outstanding for every employee — the burden of proof in a dispute sits with the employer.
• Honour the carry-forward minimum. Allow at least the statutory carry-forward of unused leave; do not impose a blanket "use it or lose it" forfeiture below the legal minimum.
• Keep records. Leave and payroll records should be retained for at least five years in line with general UAE record-keeping practice.

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Common disputes

Five disagreements recur in MOHRE complaints over leave encashment:

• Basic vs gross. The employee expects encashment on full salary; the employer pays on basic. The law sides with basic salary unless the contract says otherwise — so the contract wording is decisive.
• Disputed leave balance. Employer and employee disagree on how many days were actually taken. Without a clear leave record, this is hard for the employer to defend.
• Fractions of the year. The final partial year is sometimes ignored; the law requires it to be paid pro-rata.
• "Use it or lose it" forfeiture. Employers occasionally try to void accrued leave entirely. Accrued statutory leave cannot simply be cancelled below the legal minimum.
• Delayed final settlement. Encashment withheld or delayed beyond the settlement window. Leave pay is due as part of the final settlement, not at the employer's convenience.

If a dispute can't be resolved internally, either party can file a complaint with MOHRE (via the app, website, or 600 590 000) — the process is free and starts with mediation before any referral to the labour courts.

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Calculate with RadixHR

Leave encashment errors almost always trace back to one of two things: the wrong salary base, or an inaccurate leave balance. Both are avoidable when accruals are tracked automatically and the calculation uses the right formula every time.

RadixHR tracks every employee's leave accrual, carry-forward, and outstanding balance in real time, applies the correct basic-salary encashment formula automatically, and feeds the result straight into the final settlement alongside gratuity — so the number is right the first time, for both sides.

Calculate with RadixHR. Try the free UAE leave-salary calculator to check any encashment figure in seconds, or see how the platform automates leave tracking and final settlements end to end.

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Disclaimer

This article is for general information only and is not legal, financial, or compliance advice. UAE leave and encashment rules are set by MOHRE under Federal Decree-Law No. 33 of 2021 and Cabinet Resolution No. 1 of 2022, and may be updated. Figures in the worked examples are illustrative. DIFC and ADGM operate under separate employment regimes. Always verify current entitlements with MOHRE, a qualified UAE labour lawyer, or a licensed PRO before acting.

Authoritative sources

MOHRE (mohre.gov.ae) · UAE Government Portal (u.ae) · Federal Decree-Law No. 33 of 2021 (UAE Labour Law), Article 29 · Cabinet Resolution No. 1 of 2022 (Executive Regulations), Article 19.