All organisations want the payroll process to run as efficiently as possible. Done well, this will ensure employees receive the correct amount of pay each month, and that the organisation itself meets its various compliance obligations.
But an inefficient process will cause huge issues for businesses, both through disgruntled employees but also unnecessary stress in HR and payroll teams, as well as potentially leaving the organisation exposed to fines as a result of failing to adhere to legislation.
Then there’s the issue of in-house vs payroll outsourcing costs to consider, and it’s important here that you understand the full costs involved with both options.
This guide will explain the different approaches to handling payroll, and help you find the solution that best meets the needs of your organisation.
In this article
- How payroll outsourcing works
- How an in-house payroll team works
- Assessing in-house vs outsourced payroll costs
- How to decide on in-house or outsourced payroll
How payroll outsourcing works
Payroll outsourcing in the UK essentially hands over the responsibility for the processing of payroll to an external provider. There’s still a need to provide accurate information around hours worked, employees leaving and joining, and rates of pay, but a payroll bureau will calculate pay on your behalf, taking into account any deductions for tax, National Insurance, pension payments and other deductions such as student loans or salary sacrifice benefits.
If you appoint a bureau that is authorised to operate as an agent, it will also handle all reporting to HMRC, including P11d reporting at tax year-end, ensuring you remain compliant. This will allow them to receive tax notices such as tax code changes on your behalf, and if the provider is BACS-approved this will extend to paying your employees or HMRC.
Delegating responsibility to an experienced team of payroll professionals means you no longer need to worry about staying on top of new laws and regulations, or have to go through the monthly process of running the payroll itself. In turn, this can free up time and resources within internal HR teams, to focus on other, more strategic initiatives, as well as removing the need for ongoing training and recruitment of staff.
Working with an outsourced payroll provider also means you’ll have access to the latest software, so you don’t need to worry about paying for the latest updates.
How an in-house payroll team works
Having an in-house payroll team means you’ll have your own people to handle all your payroll needs, whether these are dedicated payroll professionals or make up part of the HR or finance teams.
These individuals will be expected to take responsibility for the three main stages of ensuring payroll runs smoothly: gathering the necessary data, processing that information to ensure a full calculation of the pay run, and then sending out returns to employees, HMRC or other bodies such as pension providers.
This means an in-house payroll team will need to stay up to speed with the latest legislation and tax rules – and how to interpret and apply these – as well as the reporting obligations to HMRC or other organisations. For some businesses, there is a sense that they remain in control of payroll when it is operated in-house, and those with the necessary expertise may feel they would rather it remain that way.
There are, though, some significant risks attached to this approach. Failing to stay on top of legal requirements or making mistakes as a result of over-stretched resources could lead to problems with people getting paid or hefty fines, particularly around non-compliance with HMRC or GDPR requirements. Furthermore, relying on the knowledge of one or two in-house people can be a risky strategy, and many people find themselves struggling when key people move on or retire, or have to take time off work unexpectedly.
Assessing in-house vs outsourced payroll costs
Any decision around having your payroll outsourced or done in-house needs to factor in the costs, and this should include the total cost of both offerings.
Most payroll outsourcing arrangements will typically charge on a per-payslip basis, but the exact amount will depend on the complexity of any arrangements. Factors here could include the frequency of payment runs, whether the provider is required to act as an HMRC agent, and the level of support that is required.
Ideally it would be beneficial to agree an upfront fee with a provider, but some payroll bureaus will charge extras for services such as adding new joiners or leavers, carrying out tax-year-end processes, P45 or P60 production, or any upgrades or re-runs. It’s worth clarifying exactly what is covered and what isn’t at the beginning, as otherwise it can be difficult to compare the true cost of any arrangement.
When assessing the costs of in-house payroll, it’s important to factor in all the costs associated with running your own operations. These will include the cost of hiring and employing staff on an ongoing basis, including the less obvious costs of employment such as pensions, National Insurance contributions, sick pay and holiday cover. Knowledgeable payroll professionals are notoriously hard to come by, too, so there’s likely to be a recruitment fee involved. You’ll face a battle to hold on to them, so be prepared for this to be a regular occurrence.
The cost of training staff should also be taken into consideration, including providing staff with regular legal updates on the latest rules and regulations, and the knowledge required to conduct year-end processes. Then there’s the cost of the payroll software itself, which will attract a regular monthly fee.
Another factor to consider is the time that is taken up by staff running the payroll process in-house, compared to an outsourced relationship, where this is done for you. Particularly if this has not been done in an efficient manner, moving to an outsourced payroll arrangement means that your own in-house staff will have more time on their hands to focus on other activities, which can potentially add more value to the wider business in areas such as employee engagement, retention or wellbeing.
Significant time savings will also be generated by not having to deal with HMRC, pension companies and your own internal finance team, as these are all areas that can be undertaken by the outsourced payroll provider.
It is also necessary when assessing the costs to factor in the likelihood of mistakes being made in an in-house environment. These can be the result of human error or oversight, and could lead to large fines as well as reputational damage. Companies that breach GDPR rules, for instance, can be fined as much as £17.5 million or 4% of the total annual worldwide turnover in the preceding financial year, whichever is higher.
There’s also the lower-level frustration of employees who have been paid incorrectly or not the amount they were expecting, which can have damaging effects, including potential financial consequences should they choose to leave or disengage with their work. The risks of payroll errors happening with an outsourced payroll provider are far lower, because payroll is their main area of expertise and the provider’s experts will benefit from regular training and supervision.
How to decide on in-house or outsourced payroll
Working out whether outsourced payroll is right for your business is not easy and will depend on both your existing arrangements and future plans. For organisations with inefficient payroll processes, which take up a lot of time each month and cause a lot of issues as a result of mistakes or simply not having the time to do it, it could well be that now is the time is right to outsource.
Other businesses with existing capabilities within their in-house teams may feel their current arrangements work well, and may look to change these further down the line rather than immediately. Some may even fear losing control, although a good way to ensure this is not the case is to get testimonials and references from existing customers of an outsourced payroll provider, to find out more about how the relationship works in practice. Providers such as Ciphr will allocate a dedicated customer success executive as a dedicated point of contact, ensuring effective lines of communication should any issues or queries arise.
A thorough assessment of the costs involved in both outsourcing payroll or keeping it in-house is essential, and both analyses should explore the full range of factors that make up the total cost. You can get an idea of how much you might be able to save by moving to outsourced payroll using Ciphr’s outsourced payroll calculator.
It’s also worth giving some thought as to your future plans; if your organisation is about to embark on a period of rapid expansion (whether through organic growth or a merger or acquisition), and might need to accommodate large numbers of new people – either on an existing payroll or as a bolt-on – then having the ability to ramp up capacity is essential. It’s more likely this will mean outsourced payroll will be a good fit, because it provides the ability to increase provisions as and when needed, without adding to the burden of overworked HR or finance teams.
What’s really important here is that you conduct a thorough assessment of the market before making any decisions, including asking exactly what is included in any price and taking up those all-important references.
Summary
The reality is that payroll outsourcing is likely to be the right move for most organisations. Not only does this free up time in your HR and finance team, it can also ensure you benefit from the latest knowledge and expertise around key pieces of legislation, without having to worry about recruiting and training people yourself. With the potential to save significant costs too, it’s likely that your next move will be towards an outsourced arrangement. To find out more about how Ciphr can help your business manage its payroll needs, download our brochure or request a demo. You can also use our free outsourced payroll calculator to find out how much you could save by switching to an outsourced payroll company.