Zakat Tax- A Complete Guide to Get Started

zakat tax

To know where Zakāt comes from, we should first know- What is Sharīʿah? 

The Sharīʿah (meaning, “the path leading to the watering place”) is a divinely appointed code of conduct that directs Muslims towards a pragmatic expression of religious conviction in this world, and the main objective of spiritual favour in the world to come. Ritual activities like daily prayers (ṣalāt), almsgiving (zakāt), fasting (ṣawm), and pilgrimage (hajj) are essential components of Sharīʿah law. 

The Sharīʿah is concerned with standards of ethics as well as legal regulations signifying not only what a person is entitled or obligated to do in law, but also what one needs, in moral compass, to do or abstain from doing. Sharīʿah is more than just a legal system; it is also a systematic code of conduct that encompasses both private and public activities.

What is Zakat?

Zakat, Arabic zakāt, is a mandatory tax levied on Muslims, and it is one of Islam’s five pillars. The zakat is imposed on five types of property: food grains, fruit, camels, cattle, sheep, goats, gold and silver, and movable goods, and is chargeable annually after one year of ownership. The tax levy mandated by religious law differs by category. Zakat, which means purification, is the gesture of donating a fixed portion of your total income to charity once a lunar year and is obligated of every sane, adult Muslim whose accrued earnings surpass the existing Zakat nisab value. 

If a business is controlled by a Saudi investor or a citizen of a GCC (Gulf Cooperation Council) country, they must pay Zakat, an Islamic tax. If a business is co-owned by Saudi (or GCC) investors and non-Saudi investors, the non-Saudi investors’ percentage of taxable income is subject to income tax. The business’s Saudi owner will be obligated to pay Zakat. Zakat is more than just a donation to those who need it; it is an act of devotion. 

Zakat receivers usually involve the poor and disadvantaged, the collectors, and “those whose hearts it is necessary to reconcile”—for example, discordant tribespeople, debtors, helpers in jihad (holy war), and pilgrims. The gathering and spending of zakat was a function of the state during the caliphates. Apart from countries like Saudi Arabia, where Sharīʿah (Islamic law) is strictly enforced, it has been left up to the people in today’s Islamic community.  

What is Nisab?

First and foremost, what is the nisab threshold? The Zakat nisab value is the bare minimum that a person must meet to be qualified to pay Zakat in that particular lunar year. To be able to pay Zakat, the total capital must equal or outweigh the nisab value. And then, what is the Nisab value? The present value of gold and silver is linked directly to the nisab value. The nisab valuation is stated in the Holy Qur’an as 612.36g of silver or 87.48g of gold. Initially, the silver and gold nisab values were the same, but they have since evolved, with the silver nisab becoming considerably lower than its gold equivalents. The nisab value can be calculated at any time by translating these weights into your domestic currency.

Assets that fall into the tax bracket 

  1. Cash- Cash in the form of bank savings, net rent earnings, cash for individual use, or savings outside of a bank – all aspects of cash are subject to this tax assessment.
  1. Loaned money- The money you lent to somebody or the money you owe from any business endeavour is also subject to this tax.
  1. Gold/Silver- According to the Saudi government’s laws, gold and silver items are also taxable items. All gold and silver pieces of jewellery, whether worn or stored, are taken into account in the tax assessment which is one of the four pillars of Islamic law. 
  1. Investments- According to tax laws, an investment in shares made with the aim of reselling is Zakatable. Only when, on the other hand, an investment is made with the long-term goal of yielding dividends, the tax is only subject to the assets of the company that fall under the scope of this Islamic evaluation.
  1. Assets in the business- Any inventory bought with the motive of reselling falls into the tax bracket and must be acknowledged at the resale price for tax purposes.
  1. Personal liabilities- In the Zakat assessment, the amount you owe is a critical component. Outstanding debts on the recurrent yearly date on which you must pay the tax are included in your liabilities. Potential debts (such as rent, utilities, and so on) are not included in this area. Moreover, personal liabilities such as mortgages and school loans are only evaluated for the following lunar year. 

What is the Zakat Percentage? 

Your Zakat charity should equal 2.5 percent of your total income for the year. For instance, if your net income (after deducting any liabilities) were £10,000, you would be obligated to pay £250 in Zakat. You can try this Zakat Calculator to calculate your figures.

Paying your Zakat 

Your contribution should go toward assisting Zakat-eligible people as an essential act of worship, as commanded by the Prophet Muhammad (PBUH).

When should Zakat be paid? Because zakat is calculated on the basis of a full lunar year, most Muslims pay it at the end of the year. While it is possible to pay Zakat at any time, many Muslims choose to do so during Ramadan. Who do we have the authority to donate Zakat to? According to the Holy Quran, zakat donations are dispersed among those that need it the most:

  1. The impoverished
  2. Those in need
  3. Those in need of assistance
  4. Those who are in debt 
  5. Those who are enslaved or kept against their own will
  6. Allies of the Islamic community and new Muslims
  7. Those who work for Allah’s cause as Zakat administrators

Zakat Rules on Tax in the UK 

Taxation in the United Kingdom can affect Zakat in several ways, but there are Zakat guidelines to help you if you have any questions. Personal taxes, such as road and income taxes, are not exempted from Zakat for the majority of people. The sole exception is if the taxes owed are past due, in which situation they become a deductible debt, but this is a rare occurrence. Filling out UK tax returns is a vital element of being self-employed for certain people, particularly business proprietors. In this case, many people will set aside money in their bank account only for the purpose of filing their tax returns. This amount saved for tax purposes is deducted from the Zakat total.

Take the help of Pulse Infotech Co. Zakat approved E-Invoicing service providers in Saudi Arabia.

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