As the blessed month of Ramadan approaches, a pressing question echoes amongst us all: What is Zakat and how do we accurately calculate it?

Zakat isn’t just a fundamental pillar of Islam, it’s also a unique social welfare system. The word itself means ‘to cleanse’ or ‘to purify,’. Zakat serves as an act of worship that purifies our wealth and soul while fostering solidarity within the Muslim community. By donating a portion of our wealth,2.5% to be precise, we can contribute to the well-being of our communities, redistributing wealth to uplift the marginalised and alleviate poverty. Allah (SWT) says in the Qur’an,

“Establish prayer, and pay alms-tax. Whatever good you send forth for yourselves, you will certainly find its reward with Allah. Surely Allah is All-Seeing of what you do.” (Surah Al-Baqarah 2:110)

Understanding how to calculate Zakat is a must for every eligible Muslim. It is not merely a financial exercise; it is an integral part of our worship. Just as we meticulously observe Salah and Sawm, so too we should be diligent and exacting in fulfilling our Zakat obligations.

Who is Obligated to Pay Zakat?

Zakat is obligatory upon every sane, adult Muslim who possesses wealth above the Nisab threshold for a lunar year. For those who are financially capable, giving Zakat isn’t just a suggestion – it’s a responsibility. It’s a way to express gratitude to the Almighty for the blessings we’ve received and to acknowledge our interconnectedness as part of a greater community.

Ensuring Zakat is paid to eligible recipients is also an extremely important aspect of of fulfilling one’s Zakat obligations. In Ramadan, you may come across many fundraising pages that encourage people to give in the way of Allah but not all are collecting Zakat.

As Muslims, it is incumbent upon us to double check if the causes we are donating to are accepting Zakat donations so we can ensure the money gets to the right people and our Zakat is fulfilled. For example, some charitable causes like building a mosque do not qualify for Zakat. 

Zakat is a pillar of faith and a religious obligation and hence it is of utmost importance that we are mindful and cautious to ensure our obligation can be discharged correctly inshaAllah.

What is Nisab?

Nisab refers to the minimum amount of wealth one must possess for one whole lunar year before being liable to pay Zakat. 

If your wealth is below the Nisab and you are among the categories who are eligible to receive Zakat, then by receiving it you are still fulfilling Allah’s command, as Zakat is not only an obligation for the giver but also a means of support and purification for the recipient.

How to Calculate Nisab?

The Nisab was set by the Prophet Muhammad (ﷺ) at a rate equivalent to 

• 87.48 grams of gold 
• 612.36 grams of silver

To calculate Nisab, you can refer to the current market value of gold or silver here. This value determines if you meet the threshold for paying Zakat or not. If the total value of your assets for one whole lunar year is equal to or more than the Nisab amount, you are obligated to pay Zakat.

What is Zakat Applicable on?

Zakat is applicable to various assets beyond personal usage and it is only calculated on wealth that you have full ownership of. This includes things like:

• Cash
• Savings
• The value of any gold and silver you own
• Some types of pensions 
  • Zakat is only due on defined contribution schemes such as, Personal Pension Plans or Group Personal Pension, Additional Voluntary Contribution (AVC), Self-Invested Personal Pension (SIPPs) and Stakeholder Pensions/ Group Stakeholder Pensions. Zakat is not due on defined benefit schemes. Therefore, final salary and CARE schemes are not Zakatable. You can find out more on zakat and pensions here. 
• Foreign currency
• Stocks, shares, and cryptocurrencies
• The amount of rental income which remains on zakat anniversary after excluding the expenses you incurred in maintenance etc, even if it’s on a mortgage 
• The value of any wealth you have given out that you expect to be returned to you like money you’ve let someone borrow

Paying Zakat on Gold

There is a difference of opinion on if the gold you wear should be included in your calculation for Zakat. According to the Hanafi school of thought, Zakat is due on all the gold and silver you own, regardless of if you wear it. According to the other schools of Islamic law, Zakat is not due on gold jewellery that you wear. However, gold that you have as an investment should be included in the calculation. If you have jewellery with semi precious stones, you can take it to your local jeweller to have the actual gold amount weighed and valued.

You can find out more on our article below:

A Guide to Paying Zakat on Gold

How to Calculate Zakat?

There are 4 easy steps to working out your Zakat:

1. Work out what you own, for example any cash, gold investments or any of the assets referenced above
2. Work out what you owe, for example any debt. Only include debts that are payable in the next 12 months (such as student loans in the UK), and do not include any future expenses or bills (i.e. not beyond the month in which you are paying zakat).
3. Work out the difference between the two, if the balance is more than the Nisab value, then you are eligible to pay Zakat
4. Work out 2.5% of that, and this is your Zakat amount

Here’s an example of a Zakat calculation using the steps above:

Step 1: Working out what you own

• Let’s say you have £5000 in savings
• £1000 in your current account
• Some gold worth £670
• Someone owes you £200 that you expect to be returned to you
• You have an investment worth £1200 today. And you’ve recently come back from holiday and have about £60 in foreign currency that you haven’t spent.
• The total of what you own would be £8,130 

Step 2: Work out what you owe

• Let’s say you have a personal loan debt of £50,000
• Each month you pay back £50, you would only include how much you would pay over the next 12 months. This 12-month calculation also applies to mortgages – you don’t take the full amount into consideration, just the interest free portion for those 12 months.
• You also have some outstanding personal and business bills totaling £1500 that need to be paid in the same month
• That would come to a total of £2,100. 

Step 3: Work out the difference between the two

Take away how much you owe from how much you own. In this case, that would be £6,030

Next, check that the balance is more than the Nisab value. At the time of writing this article, the Nisab rate for gold is £4505.22 and for silver, it is £349.05. If you have mixed assets, it is better to calculate all your assets according to the Nisab for silver. This is more beneficial to the needy and also the cautious approach, your total of £6,030 is more than the Nisab threshold which means you owe Zakat.

Step 4: Work out 2.5% of that

In this case, our Zakat amount is 2.5% of £6,030, which equals to £150.75. This means that £150.75 is the mandatory Zakat amount you must give. You can choose to give more or round up for safety or as sadaqah, but this amount is the absolute minimum obligation.

Be sure to also check out our comprehensive 10-point guide to paying Zakat for a detailed breakdown of everything you need to know!

How do I calculate Zakat on a Zakatable pension fund?

If you have a workplace pension scheme that is Zakatable (please see above),  ask your local scholar on what percentage of that amount would be eligible. Make sure your pension is invested in a fund that follows Islamic principles (sharia-compliant). If you can’t afford to pay Zakat now, you can delay it until you receive your pension or set up a payment plan.

For example, if you find out that 25% of your pension pot is Zakatable, let’s say the value of which is £16,000, then 2.5% of that will be £400. This is the Zakat amount you will need to pay on your pension fund at the end of a lunar year. If you cannot pay it right now, you must keep a track of the Zakat value for every year until you are able to pay it. 

When to Pay Zakat?

Zakat is paid once a year. The Islamic calendar is based on the lunar year, which is around 354 days. Your Zakat is owed one lunar year from the date that your wealth first equals or exceeds the Nisab rate and it needs to be paid immediately on that date. The date will be used again in the following year as your “Zakat anniversary”. It is recommended to pay the entire amount of Zakat at once, as soon as it is due and not to delay unnecessarily.

Many Muslims opt to pay Zakat during Ramadan, aiming to maximise the spiritual benefits and rewards associated with this blessed month.

Knowing how to calculate Zakat is essential for all Muslims who want to do their part in fulfilling their religious and social duties. By understanding the significance of it, knowing who is eligible for Zakat, working out the Nisab, and calculating Zakat on different assets, we can fulfil our obligation correctly make sure our contributions can make a meaningful impact on our society and truly help those in need. 

May Allah (SWT) guide us to embrace the spirit of generosity embedded within the practice of Zakat.