Can I Use My Interest Money to Offset My Tax Obligations?

Answered by Shaykh Muhammad Carr

Question

We are five partners in the business, and I am the only Muslim. I have been allocated approximately £1000 as my share of the interest accrued in our business bank account. I have already paid £450 in tax on this amount.

Should I donate only the remaining £550 to charity to dispose of this impure wealth, or must I donate the entire £1000

Additionally, if I donate the full £1000 and use Gift Aid, the charity will receive £1250 in total, and I will receive £250 (25% of £1250) as a tax rebate in the following year. Must I also donate this £250 to charity?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

I pray you are in good faith and health. May Allah reward you for ensuring your sustenance (rizq) is permissible.

Giving and receiving interest is decisively impermissible in Islam. Allah says,

“O believers! Fear Allah, and give up outstanding interest if you are (true) believers. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.” [Quran, 2:278-279]

You should donate the full £1000 interest without expecting any reward, as you are doing so on behalf of the rightful owners of the wealth, which was misappropriated through interest. Using the interest money to offset your tax obligation is not permissible.

The rebate or deduction received is independent of your interest donation. You are not obligated to give it to charity. [See: Tax Deductions and Zakah]

General Rule of Unlawful Funds

The general rule that applies to disposing of unlawful funds is as follows:

One: Where the rightful owner is known, it must be returned to the rightful owner.

Two: Where the rightful owner is not known (or if they refuse), the funds must be disposed of in one of two ways:

• It must either be given towards a charitable cause that benefits the public at large, such as public hospitals, schools, or mosques; or
• It should be given in charity to a person who is entitled by his need to receive charity. [Nawawi, Majmu‘ Sharh al-Muhadhdhab; Karaan, Disposal of Riba (Fatwa issued by the MJC)]

And with Allah alone is our success.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Dr. Muhammad Abu Bakr Badhib

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.