Many Muslims in the UK own shares, whether directly, through a workplace pension or in a fund. Most of them have the same question: do I owe zakat on this, and how much?
This post explains the main ideas behind zakat on shares, the points on which scholars differ, and a simple way to organise your figures before you speak to someone qualified. It is general education, not a ruling on your own situation.
Why is zakat due on shares at all?
Zakat is one of the five pillars of Islam. It is due on wealth that is held beyond a minimum threshold for a full lunar year. Classical scholars discussed zakat on gold, silver, trade goods, livestock and crops. Shares did not exist in their time, so modern scholars have applied the established principles to them.
The Qur'an links zakat to purifying wealth and to the rights of those in need. In Surah at-Tawbah (9:103), Allah says: "Take from their wealth a charity by which you purify them and cause them increase." Seen this way, zakat is both an act of worship and a regular reminder that wealth is a trust.
A share is a part-ownership of a business. Because that business holds assets, stock and cash, most contemporary scholars treat shares as zakatable wealth. The disagreement is mainly about how to value them for zakat.
What do you need to know before calculating?
Three building blocks apply to nearly all zakat calculations.
- The nisab. This is the minimum amount of wealth before zakat becomes due. It is linked to the value of either gold or silver. Scholars differ on which standard to use. The silver standard gives a lower threshold, and many scholars favour it because it means more people with modest savings give zakat and more benefit reaches those in need. Others use the gold standard. Check the current price of whichever you follow, and ask a qualified scholar if you are unsure.
- The hawl. This is the lunar year. Your wealth should stay above the nisab for a full Islamic year. Many people choose a fixed date each year, such as the first day of Ramadan, to value everything at once.
- The rate. For wealth like cash, gold and trade assets, the rate is 2.5% of the zakatable total.
Zakat is calculated on your overall zakatable wealth, not on shares alone. Your savings, cash, gold, shares and other qualifying assets are added together, and short-term debts that are due are usually considered too.
How is zakat on shares calculated?
The method depends on why you hold the shares. Scholars commonly describe two broad situations.
1. Shares held for trading. If you buy shares with the intention of selling them, as a trader does, they are like trade goods. The common position is that zakat is due on their full market value on your zakat date, at 2.5%.
2. Shares held as a long-term investment. If you hold shares for the long term, for example to receive dividends or for retirement, scholars have offered several views:
- Market value view. Many contemporary scholars say that shares are zakatable at their full market value, at 2.5%, whatever the intention. It is simple to apply and widely used.
- Underlying assets view. Some scholars say that when you hold shares as a long-term investor, you are in effect a part-owner of the company's assets. On this view, zakat applies only to the part of the company's assets that are themselves zakatable, such as cash and stock for sale. Factories, equipment and buildings used in running the business are not. This needs company data and is harder to do by yourself.
- Dividend view. A minority position treats shares like an income-producing property, with zakat due on the dividends rather than the share value.
The AAOIFI Shariah Standard on zakah discusses these categories. Scholars and zakat institutions still apply it in different ways, so it is worth asking a qualified scholar which approach fits your circumstances.
A simple worked example
Here is an illustration with made-up numbers. It is not a recommendation or a statement of anyone's real position.
Suppose that on your zakat date you have:
- Shares and fund units with a market value of £10,000
- Cash savings of £2,000
- A credit card bill of £500 that is due now
Using the market value approach, you would add the zakatable assets (£12,000) and deduct the short-term debt (£500). That leaves £11,500. At 2.5%, the zakat due would be £287.50, provided the total is above the nisab you follow.
Scholars discuss how debts should be treated, especially long-term ones such as mortgages. Many deduct only the instalments due within the coming year. Others take different views, so this is another good point for a scholar's guidance.
What about funds and pensions?
Shares are often held through a fund, such as a Shariah-screened global equity fund. Most scholars apply the same reasoning to fund units as to shares, using the market value of the units on your zakat date. Some funds also publish a figure for the zakatable portion of their assets, which can help those following the underlying assets view.
Pensions are less clear-cut. Some scholars say that zakat is due only when you can access the money. Others say it is due annually on the value you could withdraw, and some differentiate between types of pension. This is an area where personal circumstances matter a great deal. A qualified scholar can advise on your own arrangement, and a regulated financial adviser can explain the technical rules around access and valuation.
Is purification the same as zakat?
No. They are often confused, but they are separate obligations.
Zakat is the annual charitable obligation on your wealth. Purification (sometimes called tazkiyah or cleansing) concerns any portion of dividends that comes from impermissible activity, for example a small amount of interest income within an otherwise acceptable company. Scholars who permit holding screened shares generally require that this portion be given away without expecting reward. It does not count as zakat.
You can read more about how screening works in our earlier post on Shariah stock screens. Screening decides whether a share is acceptable to hold. Zakat is due on shares that are acceptable, and purification deals with what remains impure in the dividends.
Practical habits that make zakat easier
- Choose one zakat date and keep to it each year.
- Take a record of your holdings, with values, on that date. Brokerage and fund statements usually provide this.
- Keep a note of debts due within the year.
- Record how you reached your figure so that it is easier to repeat next year.
- Pay zakat to eligible recipients, as set out in Surah at-Tawbah (9:60), and not before checking that the organisation or person qualifies.
Zakat is a personal act of worship, and the details of your situation matter. Ask a qualified scholar about your own affairs. If you want to understand the financial side, such as how your holdings are valued or taxed, a regulated financial adviser can help. The UK government and MoneyHelper websites also offer neutral guidance on pensions and savings.
Frequently asked questions
Do I pay zakat on shares I plan to keep for many years?
Most contemporary scholars say yes. The usual approach is to value them at market value on your zakat date and pay 2.5%. Some scholars use the underlying assets approach or the dividend view instead, so ask a qualified scholar which to follow.
Do I pay zakat if my shares have fallen in value?
Zakat is generally based on the value on your zakat date, not on what you paid. If the value has fallen, the zakatable amount is lower. If your total wealth is then below the nisab, zakat may not be due at all.
Can I pay zakat from the dividends?
Many people do, as dividends are a convenient source of cash. What matters is that the correct amount is paid. Dividends used for zakat should not be confused with purification, which is a separate matter.
What if I hold shares inside a pension or ISA?
An ISA is treated like other holdings: the value on your zakat date is generally included. Pensions are more debated, depending partly on whether you can access the money. A qualified scholar can advise on your own position.