Add a tax rate

Add your own tax rate if your organization needs more options than Xero's default rates. Your tax rates can apply to sales, purchases, or both.

Add a new tax rate

  1. On the Settings menu, select General Settings.
  2. Under the Organization heading, click Tax Rates.
  3. Click Tax Rates to see the existing rates, then click New Tax Rate.
  4. Enter a display name and select the tax type.
  5. Add the tax components.
  6. Click Save.

Tax rate display name

The name identifies the tax rate in the chart of accounts and on your transactions. It's only shown within Xero. It doesn't appear on your invoices, quotes, or other documents you send outside Xero.

Image showing the display name for a new tax rate.

Tax components

A tax component is a percentage rate applied to an item when you use the tax rate.

Image showing multiple components in tax rate.

  • You can include up to 6 components in a tax rate.
  • When using the same component in different tax rates, use the same component name so the tax is reported in one amount in the Sales Tax Report. Every version of a name (for example, City Tax, CityTax, City Tax Rate) is treated and reported as a different component, even if their rates are the same.
  • You can use the same component for both sales and purchases tax rates.
  • If you have more than one component, any one of the components can be a compound rate. Including a compound rate means the 'effective tax rate' is higher than the nominal rate. The effective tax rate is used to calculate the tax on a line item.

    Image showing multiple components with compound component.

  • If you are entering transactions that use a different tax rate for each line, you will see each tax rate and amount listed separately before the transaction total.

    Image showing different tax rates.

Add and apply use tax

You can record use tax by adding a tax rate for it. Once you've added the tax rate, enter the bill with separate lines as follows:

  • Line one will record your purchase. Select the appropriate account and select tax exempt as the tax rate.
  • Line two is for the same amount as line one but as a negative amount. Select a suspense type account and select the use tax rate you have added.
  • Line three is for the purchase amount plus the tax amount. Select the same suspense account and select tax exempt as the tax rate.

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