How to set up and run your startup's books in Xero

Choosing a Xero plan

Xero's four main UK plans are paid monthly to Xero, and the prices below exclude VAT (Xero UK pricing). Each includes bank reconciliation, quotes, VAT returns to HMRC, Hubdoc for capturing bills and receipts, reports and unlimited users (Xero plan limits).

Feature	Ignite	Grow	Comprehensive	Ultimate
Price a month	£18	£39	£55	£70
Invoices and bills a month	20 invoices and 10 bills	No limit	No limit	No limit
People on Xero Payroll included in the price	None	1	5	10
Users who can claim expenses	None	1	5	10
Automatic reconciliation of bank lines	£3.50 a month extra	Included	Included	Included
Transactions in other currencies	No	No	Yes	Yes
Project time and cost tracking	No	No	No	10 users

Each extra person on payroll costs £1.50 a month on Ignite, Grow and Comprehensive and £1 on Ultimate, up to 200 people, and each extra expenses user costs £2.50 a month. Ignite's limits suit a company that has not started trading. Grow suits most UK startups once they are invoicing customers and paying suppliers regularly. Comprehensive is the first plan that handles invoices, bills and bank accounts in other currencies.

Setting up the organisation and chart of accounts

Start with the financial settings. If you do not choose a financial year end when you add the organisation, Xero sets it to 31 March, so change it to match your company's year end at Companies House. Leave the VAT scheme as None until the company is registered for VAT (Xero financial settings).

The chart of accounts is the list of categories each transaction is coded to, and it decides what your profit and loss account and balance sheet can show. Xero gives every new organisation a default chart. Adapt it before you start coding transactions. For a startup that usually means adding:

• a separate income account for each way the company earns money, such as subscriptions, services and grants
• direct cost accounts, such as hosting and payment processing fees, kept apart from overheads so you can see what is left from sales after those costs
• a separate director's loan account for each founder
• share capital and share premium accounts, because any amount paid for shares above their nominal value (the fixed value set for each share when it is created) must go to a share premium account (section 610, Companies Act 2006)
• a deferred income account if customers pay a year in advance, so each month's revenue includes only the part of the payment that month has earned

Bank feeds and reconciliation

A bank feed brings transactions from your bank into Xero automatically. Xero has direct feeds through agreements with banks, Open Banking feeds, and feeds for PayPal and Stripe (Xero bank feeds). Direct feeds cost nothing extra for most customers, although some UK banks charge for them and Xero passes the charge on. Connect every account that money moves through, including current and savings accounts, company credit cards and payment processors such as Stripe and PayPal.

Reconciling means matching each line from the bank to a transaction in Xero, so the books agree with the bank. On the Reconcile tab you can match a line to an existing invoice or bill, accept a match Xero suggests from a bank rule or an earlier transaction, create a new transaction such as a payment or a transfer between accounts, or leave a note for your accountant (bank reconciliation in Xero). Reconcile at least weekly.

Bank rules code regular transactions that never have a bill or invoice, such as bank charges, interest and transfers between your own accounts. A rule tells Xero how to code any line that matches conditions you set on the payee, description, reference or amount. For a payment against an invoice or bill already in Xero, use find and match (about bank rules).

Tracking categories

Tracking categories add a second label to transactions, such as a department, product or project, so you can report on each one. Xero allows four tracking categories, two of which can be active at a time, and recommends no more than 100 options in each so reports load quickly (Xero tracking categories). One useful pair for a startup is department (such as engineering, sales and operations) and product. Another is department and a tag for research and development projects, which helps link costs to a later R&D tax relief claim.

VAT settings and Making Tax Digital

A company must register for VAT when its taxable turnover for the last 12 months goes over £90,000, or when it expects to go over £90,000 in the next 30 days alone (registering for VAT). Every VAT-registered business must follow Making Tax Digital for VAT. That means keeping VAT records digitally and filing returns from compatible software, and any data moved between programs has to move by digital link (VAT Notice 700/22). Xero keeps those records and submits the return to HMRC directly.

Once the company is registered, enter the VAT number and choose the scheme in the financial settings. Xero supports the standard accrual scheme, the cash accounting scheme and the flat rate scheme on either basis, and with the Making Tax Digital return HMRC supplies the return periods. On the cash accounting scheme, VAT on a sale is due when the customer pays and VAT on a cost is reclaimed when you pay the supplier, and a company can join it if its VAT taxable turnover is £1.35 million or less (cash accounting scheme). Xero builds the return from the VAT rate on each line, so check the rate on every invoice, bill and bank transaction as you code it (how VAT works in Xero).

Invoicing and online payments

Set up your invoice template, then add a payment service so each invoice carries a Pay Now button (payment services in Xero). Stripe takes card payments, with Apple Pay and Google Pay added automatically. GoCardless lets a customer set up a Direct Debit that collects each future approved invoice on its due date, or pay once by bank transfer. PayPal is also available. Each provider charges its own fees, separately from the Xero subscription. When a customer pays online, Xero marks the invoice as paid.

For subscriptions and retainers, repeating invoices create and send the same invoice each period, and automatic reminder emails chase customers for payment (invoicing in Xero).

Bills and receipts

Hubdoc, included with every plan, captures bills and receipts. Email them to Hubdoc or photograph them with its mobile app, and Hubdoc reads the supplier, date and amount, then publishes a bill or payment to Xero with the document attached (about Hubdoc). For suppliers who bill every month, set Hubdoc to publish automatically, which leaves only the match against the bank feed. Staff who pay for something themselves can photograph the receipt in the Xero Me app and submit an expense claim for approval (Xero Expenses).

Payroll options

Payroll software reports each pay run to HMRC on or before payday (reporting to HMRC). PAYE, which is the income tax and National Insurance deducted from pay together with the employer's National Insurance, is paid to HMRC by the 22nd of the following tax month when you pay electronically. There are two ways to run payroll with Xero:

• Xero Payroll. It files each pay run with HMRC, assesses staff for pension auto-enrolment, connects to Nest and The People's Pension, and gives employees payslips in the Xero Me app (Xero Payroll).
• Payroll run by us. We run payroll for £8 per employee a month, or £12 for weekly or fortnightly pay, with a £25 monthly minimum and a £75 set-up fee. Pensions are £2 per employee in the scheme a month, with a £150 set-up fee. All prices are plus VAT.

Either way, record each month's payroll in Xero so staff costs, PAYE owed and pension contributions owed show in the accounts.

Costs from before trading and the director's loan account

Founders often pay company costs personally before the company has its own card. Record each cost in Xero with the receipt attached, and credit the amount to that founder's director's loan account, which then shows what the company owes them. The company must keep a record of money a director borrows from it or pays into it, and show the balance in its annual accounts (director's loans).

For corporation tax, costs the company incurs in the seven years before it starts trading count as if they were incurred on the first day of trading, as long as they would have been allowable then and are not capital spending (section 61, Corporation Tax Act 2009). Equipment bought before trading can qualify for capital allowances instead (HMRC guidance on pre-trading costs). Once the company is registered for VAT, it can reclaim VAT on goods bought in the four years before registration that it still has, and on services received in the six months before registration (reclaiming VAT). The same limits apply to VAT on costs from before incorporation that relate directly to the company's business (HMRC VAT manual).

Example of a founder's costs before VAT registration

This example is illustrative. A company is incorporated on 2 March 2026, starts trading on 1 June 2026 and is registered for VAT from 1 November 2026. Its year end is 31 March. Before the company had a card, the founder paid:

• a laptop on 10 March 2026: £1,440, including £240 VAT
• a freelance pre-launch marketing campaign on 20 March 2026: £3,000, including £500 VAT
• cloud hosting from May to October 2026: six monthly payments of £120, so £720 in total, including £120 VAT

The company owes the founder £1,440 + £3,000 + £720 = £5,160, shown as a credit on the director's loan account. On its first VAT return the company reclaims £240 on the laptop, because it is equipment bought within four years that the company still has, and £120 on the hosting, because every payment falls within the six months before 1 November 2026. The £500 on the marketing cannot be reclaimed, because that service was received more than six months before registration. The VAT reclaimed is £240 + £120 = £360.

In the accounts, the laptop is equipment at £1,200, the marketing costs £3,000 including the VAT that cannot be reclaimed, and the hosting costs £600. With the VAT reclaimed, £1,200 + £3,000 + £600 + £360 = £5,160, the amount the founder paid. The marketing and the May hosting payment came before trading started, so for corporation tax they count as incurred on 1 June 2026.

In December 2026 the company repays the founder £3,000, leaving £2,160 owed to them. In February 2027 the founder takes £4,000 from the company that is not salary, a dividend or an expense repayment, so the account swings to the founder owing £4,000 − £2,160 = £1,840. If the £1,840 is still owed on 31 December 2027, nine months after the 31 March 2027 year end, the company pays extra corporation tax of £1,840 × 35.75% = £657.80, the rate for director's loans made on or after 6 April 2026 (HMRC company taxation manual). The company can reclaim it once the founder repays. A loan of more than £10,000 at any time in the year must also be treated as a benefit in kind (if you owe your company money).

A monthly close routine

Closing the month means checking the books are complete to the month end, then locking that month. Pick a working day, such as the tenth of the next month, and follow the same steps:

1. Reconcile every bank, card, Stripe and PayPal account, and check each balance in Xero agrees with the statement for the last day of the month.
2. Clear Hubdoc and any draft bills, and chase receipts for payments that still have none.
3. Review the aged receivables report of who owes you money and the aged payables report of who you owe, and chase overdue invoices.
4. Check that staff costs, PAYE owed and pension contributions owed agree with the payroll reports.
5. Record adjustments for costs incurred but not yet billed, costs paid in advance and income received in advance.
6. Review each director's loan account balance.
7. Compare the profit and loss account and balance sheet with the previous month and the budget, and look into anything that moved unexpectedly.
8. Update cash, burn and runway in your cashflow forecast.
9. Set a lock date so that transactions dated on or before it cannot be added or changed, either by anyone or by anyone without the administrator role (lock dates in Xero).

In a month that ends a VAT quarter, also review the draft return box by box before submitting it. The return and the payment are due one calendar month and seven days after the quarter ends (VAT return deadlines).

What investor-ready books look like

Before you start raising, check your books against this list:

• Every bank, card and payment account is reconciled to its statement, with nothing unexplained.
• Revenue is recorded in the months it is earned, with annual subscriptions spread over the year.
• Share capital and share premium agree with the register of members, each return of allotment (form SH01) filed at Companies House and your own record of who owns what.
• Each director's loan account has a known and explained balance.
• The VAT account agrees with the returns filed, and payroll costs agree with what was reported to HMRC.
• Research and development costs are tagged so they can be traced to any tax relief claim.
• Every bill and receipt has its document attached, and management accounts show cash, burn and runway each month.

Buzz is a Xero Gold Partner. Our bookkeeping service keeps your Xero records reconciled and current, reviewed every month by a named accountant, and our page on software for startups sets out what else a startup needs and when.