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How to Correctly Categorise Expenses in Xero: A Guide for Limited Company Owners

Introduction

One of the most common bookkeeping mistakes business owners make is misclassifying expenses, which can lead to inaccurate tax reporting and financial confusion. Understanding the correct way to allocate expenses in Xero can save time, prevent errors, and ensure compliance with HMRC.

Accurate bookkeeping is essential for any business, helping you maintain financial clarity, streamline tax returns, and ensure compliance with HMRC. One of the most common bookkeeping challenges is correctly categorising expenses in Xero. Misallocations can lead to incorrect financial reporting and potential tax inefficiencies.

In this guide, we’ll walk you through how to categorise your business expenses in Xero, helping you make informed financial decisions with confidence.


Why Proper Expense Categorisation Matters

Getting your expense categories right is crucial for several reasons:

  • Accurate Financial Reports – Proper categorisation ensures your profit and loss statement reflects the true performance of your business.
  • Tax Efficiency – Allocating expenses correctly can help ensure you claim allowable deductions and avoid potential compliance issues.
  • Better Business Decisions – Categorised expenses allow you to see where money is being spent, making it easier to budget and forecast.
  • Seamless VAT Returns – If you’re VAT-registered, incorrect categorisation can result in under- or over-claimed VAT.

Common Expense Categories in Xero

Below is a table outlining some of the most common business expenses and the relevant Xero account codes. Use this as a reference to ensure your transactions are recorded correctly.


Relevant AccountExample Expenses
200 – SalesRevenue from selling products or services
260 – Other RevenueOther business income received that is not related to sales such as grants, cashback, referral fee income, commissions etc
270 – Interest IncomeBank interest earned on business savings accounts or fixed deposits
310 – Cost of Goods SoldGoods bought for resale or making your products to sell and costs directly related to the services you provide to clients
320 – Direct Wages (or Subcontractors if you have this code)Payments to freelancers or subcontractors
400 – AdvertisingAdvertising costs, including social media campaigns, Google Ads, printed brochures, or photography sessions for branding
401 – Audit and Accountancy FeesThe Orenda Collective fees and any other accounting or bookkeeping fees
404 – Bank FeesBank charges, Stripe fees or other payment systems fees
408 – CleaningCleaning services or products used specifically for business premises
412 – ConsultingCoaching fee and consultancy fees
420 – Entertainment- 100% BusinessMeals, drinks and gifts for employees on the payroll (including yourself as a director up to certain limits. More details here https://orendacollective.co.uk/christmas-tax-savings-you-dont-want-to-miss/)
424 – Entertainment- 0% BusinessMeals, drinks and gifts for anyone else such as clients, suppliers, subcontractors or business associates
429 – General ExpensesAny business cost that does not fit in any other code
441 – Legal ExpensesSolicitors, ICO fees, trademark applications etc
445 – Light, Heat and PowerElectricity and gas bills for a business premises (not home)
450 – Professional FeesPayments to consultants, or other professional advisors for business services
461 – Printing  & StationeryStationery, business cards, flyers etc
463 – IT Software and ConsumablesSoftware subscription fees for tools like Adobe Creative Cloud, Xero, or Microsoft Office, small IT costs such as cables or keyboards/mice etc.
465 – RatesBusiness rates, council tax, water (for business premises, not home)
469 – RentRent for office spaces, coworking memberships, or studio hire
473 – Repairs & MaintenanceCosts of repairing (not improving) business premises or equipment
477 – SalariesSalary payments – this should be the exact amount on your monthly payslip
479 – Employers National InsurancePAYE payments to HMRC for employee income tax and National Insurance deductions
480 – Staff TrainingCPD courses (online or in person), First Aid courses, supervision required by your professional body, business related books and resources
482 – Pension CostsEmployer pension contributions made by the company to your private pension (more details here https://orendacollective.co.uk/making-pension-contributions-via-your-limited-company/)
485 – SubscriptionsProfessional memberships related to your trade
489 – Telephone & InternetMobile phones in the company’s name or telephone and internet at business premises
493 – Travel – NationalBusiness travel expenses, such as train tickets, flights, accommodation and meals only when travelling for business and only when the costs are for employees (otherwise it becomes Entertainment). Mileage claims.
710 – Office Equipment
720 – Computer Equipment
764 – Plant and Machinery
Larger equipment purchases such as laptops, furniture, equipment (costing £150+ or will last you more than 1 year). Please choose the code that is most relevant for the item in question.
760 – Motor VehiclesBusiness vehicles purchased
820 – VATPayments to HMRC for your VAT liabilities
830 – Provision for Corporation TaxCorporation tax payments made to HMRC
835 – Directors’ Loan AccountPersonal expenses, such as groceries or personal shopping, mistakenly paid for using the company bank account. Transfers to your personal account which you don’t want to account for as dividends such as drawing on the loan balances owed to you. Money loaned from you to the business.
858 – Pensions PayablePayments to your pension provider for pension owed on employees wages
900 – LoanReceipt of a business loan and the related repayments towards the loan
910 – Hire Purchase LoanRepayments of a hire purchase loan for business assets
980 – Owner A Drawings/DividendsDividends declared and paid to shareholders from company profits
Equipment Expensed (the number may vary for this code as it is not a standard account code in Xero. If you do not have this code please contact us to set it up).Small items of equipment used for business such as IT equipment, camera equipment for photographers, fitness equipment for yoga instructors etc.

Common Mistakes to Avoid

  1. Posting VAT payments as an expense – VAT should be recorded as a tax liability, not an expense. For example, recording a £5,000 VAT settlement under ‘Expenses’ instead of ‘VAT’ (820) can lead to an inflated expense report.
  2. Incorrectly categorising travel and entertainment – Business travel should be separated from entertainment costs. Example: A train ticket for a business trip should be recorded under ‘Travel – National’ (493), but a dinner with a client should be ‘Entertainment – 0% Business’ (424).
  3. Recording dividends as wages – Dividends (980) should not be posted under salaries (477). For instance, taking a £5,000 dividend and mistakenly categorising it as ‘Salaries’ can cause payroll discrepancies.

Final Tips for Maintaining Accurate Records

  • Use Bank Feeds in Xero – Automating transactions reduces errors and saves time.
  • Regularly Reconcile Accounts – Set aside time each week or month to review transactions and ensure they are categorised correctly.
  • Consult us– If you would prefer to outsource your bookkeeping to us so you can focus on running the business, please get in touch!

By following these guidelines and referring to the expense grid above, you can ensure that your accounts remain accurate and compliant, allowing you to focus on growing your business with confidence.

For more bookkeeping tips or personalised support with Xero, contact us.