The Cost of Outsourcing Your Payroll

To outsource or not to outsource — this might be the dilemma currently staring you in the face. On the one hand, you’ve got so much to do in-house that adding payroll to the mix might seem inefficient — you have to hire a dedicated person or train someone up, so wouldn’t you be best just outsourcing it to professionals?

Well, not necessarily. 

If you could find a solution that gave you payroll advice on tap and the ability to fully control your payroll data (while minimising calculation errors, improving accuracy and reducing labour costs) — wouldn’t that be dandy? 

This blog explores the costs of outsourcing payroll services, including those pesky hidden ones. Hopefully, it helps you understand if outsourcing is for you or if there’s a better solution out there! (Hint: there is.)

What is outsourced payroll?

Also known as ‘fully-managed’ or ‘part-managed’ payroll, payroll outsourcing is when you hire a third party to oversee your payroll, so you don’t have to manage it in-house. This third party will likely be a payroll provider fit to burst with qualified payroll experts. 

You’ll either pass over a spreadsheet filled with payroll data — i.e. salaries, overtime, dates employees left/started, and holiday information. Or you’ll input all this data directly into their payroll software yourself. 

You don’t need a payroll person to do this; anyone with good attention to detail can submit this data. Which means you don’t have to hire an in-house payroll specialist. Hoorah!

The payroll provider will then manage everything else, including calculating statutory sick pay (SSP), creating payslips, producing P60s, P45s, and P11Ds, and paying wages.

Should you outsource your payroll?

When running a business, it’s tempting to outsource processes that require skilled hands, but you’ll pay a pretty penny for the privilege. So you have to work out if the cost is worth it or whether it makes sense to keep complete control over your payroll. 

Businesses might think outsourcing removes all the problems associated with running payroll in-house, and it can. However, in reality, it also brings its own set of problems, and you still have to collate all the payroll data.

By outsourcing your payroll, you’re introducing a middleman into the process, making it unnecessarily long-winded, providing more chances for miscommunication, and limiting your access to your payroll data. 

And payroll data is important. It helps drive business strategy with accurate forecasting and budgeting and by understanding resource allocation.

The costs associated with outsourcing your payroll

Some payroll services costs are obvious, like actually paying for the company to run payroll, but others aren’t as obvious such as integrations and setup fees. Learn more about the costs below.

The service itself

The payroll processing service they deliver is labour-intensive. That means you’re paying the payroll provider for the hours it takes them to complete your payroll. On average, it takes UK businesses 2.5 hours to run payroll each month. 

So if you’re submitting your data in spreadsheet format, it will take the payroll provider much longer to manage because they’re manually entering your data. And a longer process means you’ll pay more.

What can you expect to pay? Payroll providers usually charge per employee per month (PEPM). As an example, accountants can charge between £4-£10 per employee per month. Usually, the per-employee-per-month charge decreases the more employees you have. So it can get pricey when you’re a small business.

Compliance

If your payroll provider makes a mistake, it’s your business that’ll be forking out for the fine or penalty. Mistakes are made — we’re all human, which means there’s a chance your provider makes a mistake when calculating your FPS or perhaps they miss a deadline.

The only way you can reduce your chances of a fine or penalty is by choosing a provider with glowing reviews and a track record or by managing it yourself with automated payroll software.

Setup costs

There’s a setup fee providers charge to get you up and running; this fee is usually charged based on employee headcount, so factor this cost into your calculations. Then if you hire more staff, your provider might charge you again to set up new starters in their system. 

All these costs seem relatively insignificant when standing alone, but they soon add up.

Integrations

To make sure your data is accurate, consider integrating your payroll with your HR or accounting systems. The integration process means you no longer have duplicate data, and all departments are working from the same data, which makes mistakes much less likely. 

You’ll likely pay additional for integrations with a payroll provider — they might be charged as an add-on service, so make sure you’re aware of how much this costs you in addition to the basic payroll service.

Some providers will charge you more for auto-enrolment services, training, and expense management. Always read through the terms and conditions before signing up with a provider; this way, you’ll go into the contract with your eyes wide open to all costs.  

Reducing costs (and time) with automated payroll software 

Software is a happy medium between outsourcing and managing internally. 

How? 

With PayFit, for example, you can access CIPP-qualified payroll experts on tap, which means you can ask them all your questions, just like outsourcing. But you also keep hold of the control that comes with doing it yourself.

Payroll software can significantly reduce labour costs by automating many of the manual processes involved in payroll, such as calculating taxes and generating and distributing payslips. 

This not only reduces the amount of time and effort required to manage payroll, but it also helps to reduce errors and increase accuracy. And we’re all striving for a more palatable payroll process, right?

A small business survey found business owners spend 30 hours a year running payroll, and 31% are still outsourcing their payroll to their accountant. So, if that’s you, it might be time to re-assess how you’re managing payroll because payroll software is a more cost-effective and accurate way to run payroll.

Automated payroll software not only cuts down this payroll admin drain — it keeps useful payroll data in-house and keeps you fully in control of your business.

With software, nothing’s holding you back when transforming your business operations — from understanding resource allocation to enabling you to forecast and budget accurately to help your business grow.

Real-time reporting makes it easy to monitor payroll expenses and ensure you remain HMRC-compliant. And it means you pay employees accurately and on time. And you can’t ask for more than that, can you?

To sum up 

As a new business, it can make sense to outsource payroll. Outsourcing payroll services means you don’t have to hire a payroll person. 

However, by using automated payroll software, businesses can reduce labour costs, increase efficiency and accuracy, and ensure compliance with payroll legislation. All in one fell swoop. We’d call that a winning solution.

Book a demo to see how it can transform how you approach payroll.