What are the pros and cons of payroll outsourcing?

payroll outsourcing

Need to know

  • The costs of payroll outsourcing can be outweighed by the timesaving efficiencies it creates, which allow employers and staff to focus on other areas of business operations.
  • Pensions auto-enrolment can create its own payroll challenges, with fluctuating eligibility among employees on variable pay. Outsourcing payroll can help employers overcome this issue.
  • Employers should bear in mind that even though they are handing their payroll process to someone else, they are ultimately responsible for their organisation remaining compliant with legislation.

Payroll processing is a complex and time-consuming, critical business task, which is why many employers decide to outsource the job to dedicated payroll service providers with the latest technical resources, and enable their staff to add value elsewhere in the business.

Time and cost efficiencies
Outsourced payroll can be very cost effective, and offer additional operational benefits that save time and money. Alison Dodd, managing director at HR and payroll services provider Moorepay, says: “Consider the costs of employee salaries and benefits, national insurance contributions, the price of payroll software and the maintenance fees. On top of that, there are the time costs for training and processing, not to mention the added costs of stationery, computer equipment, et cetera.

“Given these, outsourcing can be considerably cheaper. Hiring internally could cost £15,000, while outsourcing the same hire can cost as little as £800.”

Auto-enrolment responsibilities
Virtually all employers are now required to provide workplace pensions for their staff through the auto-enrolment and auto-re-enrolment process. Some lower-paid or part-time staff may not be eligible, but those on variable pay can slip in and out of eligibility. One of the main benefits of payroll outsourcing is the peace of mind it brings for an employer in knowing that its payroll is being calculated and processed correctly.

“As soon as [organisations] start to employ people, payroll becomes complicated,” says Dodd. “The calculations alone are highly complex and then [they] have to send real-time information [RTI] to HMRC [HM Revenue and Customs], and face the consequences if [they] miss the deadline or get it wrong, which is usually a fine. With outsourced payroll everything is taken care of by the payroll provider, whose responsibility it is to make the [employer] completely aware of any upcoming changes.”

Size does not matter
Some employers may question whether they are big enough to justify outsourcing. But it is not really a question of size when considering payroll outsourcing, rather that of looking at the business benefits that could be derived from it, says John Ovington, sales and support director at Carval Computing.

“Take business continuity, for example. Imagine that it’s holiday time and [an employer is] struck by sickness, or some other unexpected absence, or that [its] technology fails on that critical afternoon,” says Ovington. “What [does it] do about the payroll? While no one thinks of payroll as mission critical, actually it is if [employers] don’t pay staff on time. Having an external resource that specialises in payroll means that [it is] not affected by absence because [it has] dedicated staff, and resilience built into [its] IT systems.” 

However, sometimes the size of an organisation can influence an employer’s decision to retain payroll in house, says Richard Freke, founder of outsourced HR and employment advice specialists H2R Selection. “Among the [small- and medium-sized enterprises] SMEs that we work with, it is often those employing between 10 and 150 employees that benefit hugely from outsourcing payroll,” he says.

“However, when [employers] outsource payroll, there is the potential to lose that personal touch of having someone in house to talk through any payroll queries. Some of our clients with more than 150 employees find it beneficial from a staff satisfaction and engagement perspective to keep payroll in house. We support businesses to make the right decision based on the current [organisational] size and the strategic direction of the business.”

In terms of cost, many employers find outsourcing payroll cheaper and less time consuming than running it in-house. “It eliminates the need for specialist staff, and businesses stand to make savings in other areas such as the cost of payslips, stationery, and delivery and postage,” adds Ovington.

Plus points for international organisations
For employers with staff based overseas, outsourcing payroll is almost an essential due to the challenges presented by the different employment regulations, tax regimes, and currencies of foreign markets.

Nat Davison, partner at payroll specialist and foreign exchange broker Frontierpay, says: “If [an employer is] moving into a territory, particularly if [it is] not a large player, there are a host of things [it is] not going to be aware of, for example, how to make compliant local tax payments. [The employer is] not necessarily raising profits in that country, so [it does] need to ensure that [it has] the right liquidity provider in order to make payments to employees in that territory.”

There is plenty of choice in terms of outsourced payroll providers, ranging from a simple payroll bureau to a fully managed payroll service. When choosing a provider, there are some key points that employers need to consider. As well as being reliable, a provider must be flexible, with a variety of integrated solutions to support payroll, HR and compliance needs.

Providers also need to be available, which means being prompt in responding to needs, from implementation and delivery to ongoing support. Asking other organisations about their experiences is one way of tracking down a trusted provider.

Dodd says: “As well as doing a full background check on them, [an employer should] ensure that the supplier [it] chooses is HRMC-approved and BACS- [Bankers’ Automated Clearing Services]-certified so that [it is] able to make the payments on [its] behalf.”