Where should I categorise my tax payment to in Xero?

Choosing where to categorise your tax payment in Xero is something that business owners often get confused about. Some taxes (such as PAYE and VAT) are very obvious, but your personal tax payment, and Corporation Tax are sometimes a bit less clear. So here is a handy guide. We have tailored this to Xero users, but there will be similar codes/categories in other software:

Limited Companies

PAYE, National Insurance and Student Loan – code to PAYE Payable (Xero also has NIC Payable but we find it easier to post everything to PAYE Payable, and just maintain one code. You will need to ensure your payroll journal is also only using the one code though!)

VAT – VAT (easy!)

Corporation Tax – Provision for Corporation Tax

Self Assessment – if you choose to pay your personal tax bill through your limited company, it needs to be coded to either Drawings or Directors Loan Account. This is because it is not a business expense, but a personal one. This also applies to Payments on Account.

Sole Traders

PAYE, National Insurance and Student Loan (related to payroll employees only) – code to PAYE Payable (Xero also has NIC Payable but we find it easier to post everything to PAYE Payable, and just maintain one code. You will need to ensure your payroll journal is also only using the one code though!)

VAT – VAT

Self Assessment – code to Drawings. This is because it isn’t a business expense, but a personal one. You can of course put the transaction through your sole trader bank account, however it should be coded as Drawings to prevent it being classed as a business expense, and causing an error in your profit calculation for tax purposes. This also applies to Payments on Account.