Western Liang was at its end, although its imperial clan members, including Xiao Yu, continued to be treated well by Emperor Wen.

When, at one point, Xiao Yu became suddenly ill, he ordered that no medical treatment be carried out, believing that this would be a good time for him to be relieved from governmental service.

However, when Empress Xiao heard this, she visited him and rebuked him, pointing out that this kind of behavior might in fact bring punishment from Emperor Yang.

After he recovered, he became more interested in governmental service, and was at one point made the Neishi Shilang (內史侍郎), the assistant head of the legislative bureau of government, and Emperor Yang entrusted him with many secret matters, as Xiao Yu was his brother-in-law.

In the fall of 615, Emperor Yang conducted a tour of the northern frontier, exposing himself to a surprise attack by Eastern Turkish (Dongtujue) forces under Shibi Khan, who was angered by various Chinese attempts to weaken his government.

Xiao Yu, who had accompanied the emperor, suggested that messengers be sent to Princess Yicheng, as Turkish customs dictated that the khan's wife be in charge of military matters at home while he was away.

After the siege was lifted, Emperor Yang, instead of rewarding Xiao Yu, became embarrassed, stating, "Turkish forces were simply being rebellious and lacked tactical cohesion and would have soon scattered.

He demoted Xiao Yu to the governorship of Hechi Commandery (河池, in modern Baoji, Shaanxi) and immediately ordered him to get on his way.

Also in spring 618, Emperor Yang was killed at Jiangdu (江都, in modern Yangzhou, Jiangsu) in a coup led by the general Yuwen Huaji.

When the news reached Chang'an, Li Yuan had Yang You yield the throne to him, establishing Tang dynasty as its Emperor Gaozu.

In 619, he and Pei Ji were in charge of interrogating one of the major initial contributors to Emperor Gaozu, Liu Wenjing, who had been arrested on suspicion of treason.

After Li Shimin destroyed a major rival, Wang Shichong, the emperor of Zheng, in 621, Xiao, who served under Li Shimin during the campaign and was credited with some of the strategies (as well as charged with collecting the Sui imperial treasury stores at the Zheng capital Luoyang), was given 2,000 additional households as part of his fief and made one of the deputy heads of the important executive bureau of government (尚書省, Shangshu Sheng), Shangshu Pushe, still considered a chancellor position.

Around the new year 628, Xiao was again removed from his position, for reasons not stated in history, although in spring 630 he was made a de facto chancellor as imperial censor.

In fall 630, Emperor Taizong made him an advisor to his son and crown prince Li Chengqian, no longer a chancellor.

As a result of the investigation, Hou and many other conspirators were ordered to commit suicide or were executed, while Li Chengqian was reduced to commoner rank.

Xiao was given a newly created title for a de facto chancellor as well, Tong Zhongshu Menxia Sanpin (同中書門下三品).

In 645, when Emperor Taizong commanded a major campaign against Goguryeo, he put Xiao in charge of Luoyang as well as the logistics of shipping supplies to the frontline.

Emperor Taizong was also displeased with Xiao over his requesting to become a Buddhist monk at one point around this time and then changing his mind.

In 648, while accompanying Emperor Taizong at Yuhua Palace (玉華宮, in modern Tongchuan, Shaanxi), Xiao grew ill and died.

Emperor Taizong, however, disagreed with both, stating that posthumous names should be particularly reflective of people's characters, and he chose Zhenbian (貞褊, meaning "honest but harsh") instead.