Payroll Outsourcing: A Complete Guide

You wouldn’t be wrong to think that keeping your payroll in-house gives you more control and saves you money in the short-term. After all, you know your business better than anyone else and do your best to ensure that your employees are always paid correctly. 

But how confident are you that all your payroll targets are being met and that current processes provide the efficiency your business needs? You may find that upon closer inspection there are improvements that can be made and time and money to be saved. Outsourcing payroll services can be the easiest and most cost-effective way to do this.

It’s also worth bearing in mind that in recent years HMRC have recovered more than £737 million from investigations into payroll errors, with SMEs accounting for more than half that figure with almost £364 million.

This is a particularly worrying figure when you consider that SMEs account for just over a tenth of the UK’s total payroll. It indicates that businesses of all sizes struggle to deal with complicated tax affairs due to lack of resources, finance or expertise which leads to costly mistakes and heavy fines from the tax office. 

As payroll legislation continues to evolve, keeping pace with updates can prove difficult for many businesses. While all the information can be found on the HMRC and CIPP websites, making sense of it and applying the information to in-house processes is another thing entirely. 

These are just some of the reasons why businesses rely on payroll outsourcing services to manage every aspect of their weekly or monthly salary payments.

Payroll plays an essential role in any business and is crucial to the lives of your employees, so it’s a function that needs to be well-managed to ensure accuracy, something which a reliable and professional payroll outsourcing provider is able to deliver.

Payroll outsourcing is a service provided by third party companies who work closely with businesses to ensure employees are paid and taxed efficiently and correctly, while also helping their organisation to remain compliant with HMRC requirements. 

Wage delivery is a substantial undertaking for any business, requiring a significant commitment of time, money and resources. When combined with complex tax legislation and the risk of paying fines for missed submission deadlines or tax miscalculations, it can become a burden that inhibits, rather than enhances, your business practices. 

When delivered by a reputable and established provider, payroll outsourcing services can process a company’s payroll in full, offering ongoing support, payroll reporting, auto-enrolment and provision of ePayslips and eP60s. More advanced providers also offer the option to integrate payroll and HR to help their clients save money and improve organisational efficiency.

The two main types of payroll outsourcing services used by businesses are:

Using a fully managed payroll service model means everything is outsourced to the payroll provider, including data entry and the running of reports. The provider will take care of everything, which means you only need to collect payroll data manually and pass it onto the provider to process.

This can be an ideal option for businesses that want to manage employee costs and do not want the added expense of employing specialist payroll and taxation staff. Many companies choose this option because of the long-term efficiency and cost saving benefits it can offer. 

This involves processing part of the payroll function, with data entry and reporting remaining in-house. When employees update the payroll provider’s software with new data, they can then run reports as and when they need. From here, the provider processes the data and produces the payslips.

This is a suitable option for organisations that prefer to keep data entry in-house, while having the benefit of working with specialist software and processing facilities that a provider can offer. It is generally a cheaper option compared to a fully managed solution, although it means data entry costs are maintained.

Some companies who don’t have the internal resources available may choose to use payroll outsourcing services. Reasons for outsourcing payroll services include:

Using a payroll outsourcing company can remove a time-consuming task for businesses, freeing them up to focus on other important areas of the business, particularly sales and marketing. 

Of course, the counter argument is that you are spending more money to save money, which on the face of it doesn’t appear to make sense. However, the crucial questions to ask here are how much does your time cost internally? And how do these costs compare to the potential revenue your business could otherwise be generating if employees were freed from certain responsibilities?

It may be the case that outsourcing could be cheaper in the long run, as 32% of SMEs revealed as part of a YouGov study. Additionally, a further 37% medium-sized businesses stated they have outsourced their payroll to external providers, indicating their confidence in regaining that expenditure elsewhere.  

It may be worth conducting an internal review to assess how much time is spent dedicated to smaller tasks that are preventing you from growing your business as quickly as you’d like. This could include things such as inputting data and transferring from one system to another, printing reports and sending files, distributing wages and rectifying payroll mistakes.

The time it takes to complete all these smaller tasks can slowly add up to the point where you are not able to maximise the true potential of your staff. If reallocated, they could be working on projects that give your business more commercial traction, opening up new opportunities, territories and ventures.

Not only is there a great deal of tax regulation, but it is forever changing, and unless you are a qualified or seasoned professional, making sense of the legal language can prove extremely difficult. 

This is a key advantage of outsourced payroll services, as they automatically take care of all the legislative compliance for you. When changes are introduced by HMRC, the system is updated to reflect the new requirements, so you remain compliant without having to trawl through complex explanations that can take up a lot of your time. 

Aside from legislative changes, you also need to comply with HMRC rules about submitting financial information, as well as reporting on key business figures (for example, if you have 250+ employees you must report on your gender pay gap). 

Your business could face heavy fines if Real Time Information (RTI) is not submitted to HMRC every time an employee is paid. If you carry out a weekly payroll, this can quickly become a time-consuming and exhaustive process to manage as it significantly increases your workload every month. 

Outsourcing your payroll enables you to avoid these issues, so you remain compliant and do not have to worry so much about paying out for fines that can easily be avoided with the right provider working for you. 

Ultimately, when outsourcing payroll, you need to ensure it adds efficiency to your business. While there are costs involved, the payoff comes with the increase in productivity you will experience

There is more focus than ever on private data and with all businesses required to adhere to UK GDPR law you need to ensure that sensitive commercial and customer information is always protected. 

This is not always an easy process for smaller businesses, as it may require specialist software or equipment to encrypt data and provide the right amount of storage space to account for a growing collection of customer information. 

Payroll outsourcing services provided by a reputable and established company can help in this regard and provide some peace of mind. Whether it’s using high level encryption methods or ensuring data is backed-up in a purpose-built UK-based data centre, it means data is kept safe and protected from always cyberattacks and leaks.

Staff work hard to achieve commercial goals and break new ground so businesses can flourish and grow. It’s done on the premise that they will be paid on time and to the correct amount each month, and even the smallest of payroll mistakes can influence their loyalty and commitment. 

Research has revealed that 1 in 5 UK employees have changed jobs due to payroll issues. 60% have identified issues on their payslips, while 39% have been paid late. Poor payroll can lead to higher levels of stress and mistrust between employee and employer, ultimately creating an unstable workforce and more time and money spent advertising, interviewing and replacing staff members that leave. 

Outsourced payroll services live and die on their accuracy because that is one of the main reasons they have been hired by the client. A reputable provider will take full responsibility for delivering payments on time and reduce the chances of mistakes being made, while also keeping up to date with the latest tax legislation.

When you are using outsourced payroll services there are costs involved that you need to consider. Providers will charge something called a ‘payroll fee’ that is invoiced each month based on the number of employees that are on the payroll. For businesses that payroll weekly, you will be charged per-employee-per-week. 

You can usually expect to pay between £4-£6 per employee per month, although this rate can be lower for larger companies with a higher number of employees. Smaller companies may have to pay a little more per employee, although cost packages will always be discussed in full before proceeding with the set-up process. 

There are also other factors to consider in the final cost. For example, there are set-up costs to include, which can be waived at the providers discretion as part of a wider package. Set-up costs are sometimes a necessity to cover the time and resources it takes to outsource the payroll and set everything up on the provider’s system. 

If you require payslip printing this will also incur a cost, which is why we generally advice businesses to offer digital payslips through an online portal. Not only will this reduce expenditure, but it is also an eco-friendlier option and helps to reduce your carbon footprint. 

Additional options you could also consider include integrating your HR and payroll systems and including expenses and timesheet information which can help to speed up payments. These are chargeable extras that can help to streamline processes to improve efficiency long-term.

You can find out more about payroll outsourcing costs in this blog.

Finding the right outsourced payroll services for your business may seem like a difficult task. But with good planning and the right approach, choosing a suitable partner may be easier than you think.

The first place to start is to review your current processes to get a better understanding of what is working well and where possible improvements can be made. Not only will it serve as a performance review, but also as an analysis of the time and money spent in each area.

When comparing costs, bear in mind that each payroll outsourcing provider will charge in different ways. You should also find out if there are any additional charges, such as maintenance, support or upgrade fees. However, when outsourcing your payroll there will always be charges involved, so the focus should also be on the efficiency benefits the service can offer to your business. 

Assess what kind of payroll outsourcing you would like to undertake. It could be you want to hand over the entire running of your payroll, or a partial solution that keeps some of the activities in-house could be another option. Your ‘wish list’ doesn’t have to be definitive at this stage, but you should be able to form a good idea of the core services you’d like to use.  

You’ll no doubt be looking to compare a few providers to see which one could be the best one for your business. Use the outsourcing ‘wish list’ you previously created and compare this against the services each one provides.

Look at how long they have been established and how much experience they have with payroll outsourcing. While this information won’t directly inform you of their competence, it does indicate they have built up relationships with a solid set of satisfied customers.  Once you establish contact with a provider you can speak to any existing customers to get a first-hand account of their service– the likes of Trustpilot can also provide some useful insight. 

Once you have a list of payroll providers that fit your criteria you can start to reach out to them. It’s a good idea to contact three providers who can provide not only a quote, but also a demonstration of how their service works.

And while costs matter, look at the wider picture of the service they provide, as the lowest cost doesn’t always equate to the highest value. 

One of the most important elements to consider is their ability to effectively communicate with you. This is critical because they will be potentially dealing with your employee’s salaries, so you need assurances that they are proactive and responsive to your queries and requests. Ideally, you should be allocated a dedicated account manager and given access to a wider support team for more technical-based issues. 

Flexibility of service is also something that should be discussed at this stage. Providers offering outsourced payroll services are more beneficial to your business when their solutions can be adapted to your payroll needs.

As your business grows, so too might your payroll requirements, and integrating with HR systems or setting up employee self-service options could be something that you need in the future. If a payroll provider can also tick this box and not force you to work within a very limited set of parameters, then it is worth giving them serious consideration, costs permitted, of course. 

The technology used by a payroll outsourcing company should be in line with current regulations. It should also be able to benefit your business by being easy to use, automating and streamlining current processes, offering helpful analytics and reports and be straightforward to integrate into other software. Cloud-based software is a must, as it ensures remote staff can access the system from any location.

Always ask the provider where data is being held by its cloud-based software, as you need to ensure that crucial payroll and HR information is secure and fully backed-up. Ideally, the provider should also hold industry recognised accreditations such as ISO 9001 and be part of bodies like the CIPP (Chartered Institute of Payroll Professionals).

Make enquiries about the payroll outsourcing services they provide to other companies and what kind of sectors they tend to work in. This will give you confidence that they have a good understanding of the challenges you could face and their ability to adapt and support your payroll requirements in an ongoing capacity.

When you’ve chosen the provider you want to work with, you then have to prepare for the migration. Ask them to supply an onboarding plan that details how you will transition to the new solution and the level of training and support that will be available. A reputable company will provide a payroll implementation contract that will guide you through this process, giving you a point of contact who will collaborate with you throughout. 

You will need to prepare payroll data for the transition and the provider may also check the previous quarter’s tax history for any errors that need to be corrected. Bank, employee and tax information may be reviewed before the first live payroll to ensure everything is accurate.

It is commonly believed that the best time to change to a new payroll provider is at the start of a new year, but in reality, the actual time of year doesn’t make much of a difference. Reputable and experienced payroll providers will be able to support your transition at any time, without slowing the process down.  

The best time to change to a new payroll provider is when it benefits your business and when you are in a position to go ahead with the move. If you are not receiving the support you need from your current provider, waiting for the start of a new year could prove to be more costly and damaging to your business in the long run.

By utilising outsourced payroll services, you can easily sync multiple software and business processes to improve efficiency by saving time and reducing common errors. Payroll software can usually be integrated with processes such as: 

• Health and insurance premiums and retirement plan contributions.
• Use of time and attendance data that can lead to more reliable wage calculations. 
• The introduction of new policies that affect payroll ensuring you remain compliant.
• Worker’s compensation payments can be more accurate rather than estimations. 
• Payroll costs can be compared against the sale of goods or services via point-of-sale devices. 
• Assess the most profitable jobs for the business relative to payroll.

Determining if payroll outsourcing is the right choice involves evaluating your current processes, costs, and time spent on payroll tasks. Compare these with your payroll outsourcing costs and how much outsourced HR costs. Consider how to outsource payroll effectively to gain efficiency and compliance benefits. 

This decision should align with your business goals and growth plans to ensure it adds value and supports your overall productivity. Assess how outsourcing payroll can free up internal resources.

The cost of outsourced HR services varies depending on the services you need and the size of your company, as well as the provider you choose. Typically, HR outsourcing fees are charged either as a flat monthly rate or on a per-employee basis. 

For small to medium-sized businesses, costs can range from £50 to £150 per employee per month. Larger organisations might benefit from negotiated rates, resulting in lower per-employee costs.

Hopefully this deep dive into the world of payroll outsourcing will give you a much clearer idea of what to expect and how it can be used to support your business. 

Use our guide to gain a better understanding of your payroll outsourcing needs and to define what you should look for in a provider. Once you are clear about this stage of the process, everything else that follows becomes much easier to manage. 

Take time to choose a payroll provider that offers the right level of service for your organisation, taking into account any future growth that you anticipate. While the transition will require a certain amount of internal resources to be allocated to the process, when you are convinced you have found the right partner, the long-term return on investment will make the move more than worthwhile in the end.