It is a tax on wealth, payable on various categories of property, notably savings and investments, produce, inventory of goods, salable crops and cattle, and precious metals, and is to be used for the various categories of distribution specified by Islamic law. It is also an act of purification through sharing what one has with others.
The rationale behind this is that Muslims believe that everything belongs to God, and wealth is held by man as a trust. This trust must be discharged, moreover, as instructed by God, as that portion of our wealth legally belongs to other people and must be given to them. If we refuse and hoard this wealth, it is considered impure and unclean. If, for example one were to use that wealth for charity or to finance one's pilgrimage to Makkah, those acts would also be impure, invalid, and of course unrewarded. Allah says: "Of their wealth, take alms so you may purify and sanctify them." [9:103] The word Zakah means purification and growth. Our possessions are purified by setting aside that portion of it for those in need. Each Muslim calculates his or her own Zakah individually.
For most purposes this involves the payment each year of 2.5% of one's capital, provided that this capital reaches a certain minimum amount that which is not consumed by its owner. A generous person can pay more than this amount, though it is treated and rewarded as voluntary charity (Sadaqah). This amount of money is provided to bridge the gap between the rich and the poor, and can be used in many useful projects for the welfare of the community.
Historically the pillar of Zakah became mandatory on Muslims form the second year after the Hijrah, 622 C.E. It is mentioned more than thirty times in the Qur'an, usually in the same breath as Salah. So important is this pillar that one is not considered a part of the Islamic brotherhood if one ignores this obligation.