Basic salary calculation in Saudi Arabia

In Saudi, basic salary is the fixed amount an employee receives before any allowances or deductions, as stipulated in their employment contract. In the Kingdom of Saudi Arabia, it’s not just important to calculate the salary accurately for financial awareness but it’s also crucial to protect your legal rights and to assure complete compliance under the Saudi Labor Law. As the foundation of most of the employment packages, the basic salary has direct influence on some of the important components such as end of the service benefits, social insurance contribution (GOSI), annual leave entitlements and calculation of overtime payments. For foreign employees particularly, handling a new job market, their salary structures, deductions and benefits can be demanding, having the right understanding of planning and evaluating basic salaries smartly assist them in choosing the best option that will suit their goals.

Additionally, employers having an organized salary system helps them maintain transparency, compliance, fairness and trust by encouraging a stable and satisfied workforce. In this blogpost we will further explore how Basic Salary is calculated in KSA, factors that affects the calculation and how Saudi Labor Laws impacts it.

Understanding Basic Salary

Basic Salary refers to a fixed amount that is settled with the employee during the employment contract. It doesn’t comprise any allowances, benefits, bonuses or overtime; this amount is the base figure on which other deductions and compensations are calculated. It plays a primary role in creating an entire compensation outlook of an employee in KSA, as benefits and statutory payments are established according to it. Some of the key features of basic Salary include:

• It must be stated clearly in all employment contracts
• Must be used to determine the Social Insurance (GOSI) contributions
• Used as a base for finding out end of service (EOSB) benefit
• It must exclude all the benefits, allowances and incentives
• Mainly reviewed during the evaluation of performance

Components of Salary in Saudi Arabia

The Salary structure in KSA has key 5 components including:

1. Basic Salary: This is the Base amount that company agreed to pay during employment contract
2. Allowances: It is an amount that is allowed for specific purposes such as

• Housing allowance which is mostly 25-30% of the basic salary, but depends on the company’s regulations and employee’s grade
• Transportation allowances are around 10% of the basic salary to facilitate the transportation process of employees.
• Mobile and Internet allowance varies from company to company
• Food allowances are provided typically in labor and industrial sectors
• Education Allowances for children are given by companies to mostly foreign employees or senior management
• Depending on the job and transfer status many companies also offer utility or reallocation allowances

3. Overtime Payment: Employees are eligible for extra payments if they are working extra hours beyond the standard working hours, which are 8 hours per day and 48 hours per week in total. As per the Saudi Labor Law, overtime payment must be 150% of the regular hourly payment.
4. Bonuses and Commissions: Firms offer performance-based bonuses, annual incentives or commission on sales in many sectors like banking, sales or real estate.
5. Deductions: From the monthly salary some amount can be subtracted for the purpose of GOSI contribution, or in the case of loan payments or advance salaries. Violation fines may also lead to salary loss for employees.

Does Income Tax Impact the Salary Calculations in KSA?

Even though KSA imposes strict tax regulations in KSA, there is no personal income tax on employment salaries. When an employee is working in KSA and earning a salary, taxes are not deducted apart from the insurance contributions for applicable employees. The VAT is also paid for the goods and services they purchase, but not on the salary.

There is no income tax in Saudi Arabia, which gives employees a tax friendly atmosphere, it not just offers financial advantage but also allows worker to get more of their gross income as compared to many other countries.

Factors Affecting Basic Salary Calculation

The basic salary is not fixed for every sector, designation, or business scale. It depends on many factors that affect it, to have a clear idea of what basic salary is, some important factors are as follows:

1. Industry Standards: Salaries vary across each industry, such as for oil and gas sector salaries are generally higher than hospitality or retail. Likewise, Doctors, Engineers or IT experts often have a specific salary range according to the market.
2. Experience and Qualification: Employees that are better qualified with some professional degrees get better salaries. Certifications like CPA, CFA, PMP, or a master’s degree can impact the salary offers.
3. Nationality and Saudization: Although KSA offer competitive salary packages with equality among each employee, but due to localization policies Saudi National may receive better salaries than expatriates along with added government benefits.
4. Company Policy and Grade Level: Businesses usually have organized and fixed salary scales and each position allotted is paid as per the assigned grade and its aligned salary band.
5. Negotiation and Market Demand: Negotiation plays an important role, particularly for senior level roles. The market demands certain positions, and a skilled employee can cash it in.

Legal Framework Governing Salaries in Saudi Arabia

The Saudi Labor Laws looks after all the employment related matters including the salary regulations. Hence, it is mandatory to understand the legal framework for complete compliance and protection of employees’ rights. Some of the key legal salary obligations are as follows:

• All the wages must be in Saudi Riyals (SAR)
• Employees must be paid on monthly basis (that are on monthly pay)
• Salaries must be transferred through reputable regional banks
• A maximum of 50% salary can be deducted due to any misconduct or other reason

Saudi Arabia has several legal laws that offers benefits like incentives, bonuses for not just the security of employees but also to build a structured salary system in Saudi Arabia.

• Wage Protection System (WPS): WPS ensures that employees are paid fairly on time; all companies are required to pay salaries through this system. Non-compliance results in fine and penalties
• GOSI Contributions and Basic Salary: GOSI manages social employees security, both employ, and employer contributes in it, it is mandatory for only Saudi Nationals. It covers pension on retirement, injury compensation, disability and death insurance
• End-of-Service Benefits (EOSB) and Basic Salary: EOSB under the Saudi Labor law is for offering compensation to the employees at the end of their contract. For the first 5 years it calculated as half-month’s basic salary for each year and after 5 years it is calculated as half-month’s basic salary for each year
• Annual Leave and Salary Implications: Employees must be given an annual paid leave of 21 days and 30 days’ leave after the continuous service of 5 years. If the employee leaves the job, any unused leaves can be compensated.

How to Calculate Salary in KSA?

The accurate calculation of Salary in Saudi Arabia is necessary for both employers and employees. The calculation of Salary comprises various factors as discussed above. Grasping all these salary elements helps in creating the best job offer, processing payroll, and making well-thought-out financial decisions. The total salary is determined by combining the basic salary, allowance, overtime payments, commissions, annual benefits, and incentives offered by the company, if there are any deductions. Businesses have to deduct them to compute the real take-home pay.

Let’s understand the Salary Calculation with an example.

To calculate the full salary including the incentives and deductions, let’s take an example where an employee has the following offerings:

• A Basic Salary of SAR 8000
• 30% Housing Allowance which is SAR 2400
• 10% transport Allowance which is SAR 800

The total Gross Salary will be 8000+2400+800= SAR 11,200

Now in case of any deductions, for Saudi Nationals specifically like GOSI which is 10% then the salary would become:

GOSI = 10% of (8,000 + 2,400) = SAR 1,040

Net Salary = SAR 11,200 – SAR 1,040 = SAR 10,160

Apart from that, there are other factors that affect the net salary such as overtime pay which if in case any employee works 10 hours overtime in a month then as per the rate of SAR 50 per hour the salary will be calculated as:

Overtime = 10 × 50 × 1.5 = SAR 750

Therefore, final salary with overtime = SAR 10,160 + 750 = SAR 10,910

Useful Local Calculation Tools

The Saudi payroll is highly influenced by the legal laws and employment regulations. Businesses in Saudi Arabia, specifically the startups, find it too demanding to compute the salaries in-house. Hence, they either look for a payroll service provider, which can also be costly at times for low-budgeted businesses. Another option, a precise and value-for-money process, is to use the local calculation tools available. These tools precisely compute:

• Total salaries including GOSI and EOSB
• The total working hours and additional overtime
• Leave balance and gratuity
• Estimated salary increment
• Cost-to-Company (CTC)

Tools not just smooth the process of payroll calculations and give an exact salary assessment, but also make the processing of payroll prompt. The automated salary calculations are also less prone to manual errors, which keeps the employees happy when paid on time with a clear view of their earnings, their perks, and their relevant subtractions.

Other Essential Calculators

Apart from the salary calculators, many other calculation tools are utilized by businesses and employees across the KSA. These tools also contribute to effective payroll management. Some common additional tools used by HR or individuals include:

• The calculator for annual leave encashment
• Loan eligibility calculator
• Working hour calculator
• Budget planning calculator
• Investment and saving calculator

Tips to Prevent Mistakes in Salary Calculations

Several mistakes lead to shortcomings in salary calculations. Like not knowing the basic salary, misinterpreting allowances, ignoring overtime rules, or not using reliable tools, etc. Therefore, employees and employers must adopt these common methods to emphasize exactness in salary calculation.

• Thoroughly examine payroll data and records
• Validate all the employees’ salary records before processing
• Keep the attendance maintained, including the leave records
• Update all the labor laws and payroll regulations
• Conduct internal audits to highlight any areas of gaps and modify them.

By resolving the faults and getting things right, companies can schedule timely salaries with exact calculations that keep the workforce motivated and compliance checked.

Many companies don’t emphasize the record keeping of payroll data, which gives them a hard time in case of any external audit. Having a comprehensive history of employees’ payroll documents and data is necessary. These payroll files consist of salary slips, attendance sheets, leave records, and employment contracts.

Salary Negotiation Tips for Employees

Despite of understanding the salary structure completely employees must keep the following tips for negotiations to secure a better salary package:

• By utilizing the online tools and portals compare the rates among different industries
• Underline your relevant skills, certifications and expertise apart from technical knowledge to show your worth
• Ask for a transparent and detailed offer letter with allowances, bonuses, deductions and basic salary
• Choose the offer that comes with benefits like health insurance, air tickets and bonuses
• Determine the end of the service benefits and retirement contributions for long term growth
• Compare various offers if available and pick the one that is not just best in salary but suits your needs and skills the best

How SS&CO KSA Can Help

Being one of the leading accounting firms in KSA, SSCOKSA is well familiar with the salary structures of each industry and designation. Therefore, we offer a comprehensive range of services for both personnel and executives. With the understanding of Saudi Labor Laws and compensation structuring we offer businesses with payroll management services while for individuals expiates specifically, we have special consultation services that help them decide what works best for them. No matter if you are an employer looking to stay fully compliant with the regulatory mandates, or an employee looking for clarity on salary and legal entitlement, SS&CO is here to offer you the finest consultation services that ensure compliance with satisfaction.