When to outsource payroll: The tips you need

Even in the early days of running a business, managing payroll can quickly become a time-consuming headache. So why not let more capable hands take care of this aspect?

Outsourcing could be the solution you’re looking for.

This article will go into more depth about the reasons why you might choose to outsource your payroll, the options available, and what to consider when selecting a provider.

Here’s what we cover:

What is payroll outsourcing?

Payroll outsourcing is when you hire an expert third-party to manage your company’s payroll functions.

You hand responsibility for tasks like calculating wages, deducting taxes, and distributing payments to an external specialist, leaving you free to focus on your core business activities.

Your agreement with this partner can range from simply processing a part of the operation, such as payments, to managing all aspects of payroll administration, including tax filings and adherence to regulations.

A partner that takes over the complete management of your payroll processes is often referred to as a “managed payroll” provider.

And another common name for an external payroll provider is “payroll bureau”, although this is less specific.

Why should you outsource your payroll?

Managing payroll internally can be a significant hurdle for many businesses, not least because tax regulations are in a state of constant flux.

Keeping abreast of these ever-evolving rules is a demanding task in itself.

It’s difficult enough to consistently ensure accurate and timely payments, but having to adhere to increasingly complex legal requirements greatly adds to the administrative burden.

It demands meticulous attention to detail and a commitment to keeping your expertise up to date.

Without a dedicated team well versed in these intricacies, your business runs the risk of costly errors.

Such mistakes can lead to penalties, legal issues, and a drain on valuable time and resources that could otherwise be focused on the growth of your business.

Outsourcing payroll to specialists can alleviate this burden and provide peace of mind.

Outsourced payroll vs in-house payroll

The decision between outsourced and in-house payroll often depends on the size and complexity of your business.

Setting up payroll in-house provides maximum control but requires significant investment in expertise, time, and resources.

For businesses choosing this route, payroll software can be an invaluable tool. It automates calculations, manages deductions, and helps ensure compliance, making the process more efficient and less prone to errors.

HR and payroll outsourcing partners also use specialist software, but they are trained to leverage much more of the functionality.

You relinquish some direct control by hiring partners, but the benefits of outsourcing payroll are that you can tap into expertise and potentially reduce your administrative overheads.

What to expect from outsourced payroll

When you adopt outsourced payroll services, your partner typically handles a wide range of tasks to streamline your payroll process.

This includes accurately calculating employee wages based on hours worked or salary agreements.

They manage all necessary tax deductions, encompassing income tax and National Insurance contributions, and ensure these are remitted to HMRC on time.

Providers also handle other deductions, such as pension contributions, student loan repayments, and benefits administration.

The way you share employee data with your provider can vary. Some may accept information via spreadsheets, while others offer direct input into whichever specialised payroll software they use.

This not only reduces manual data handling and potential errors, but also is more efficient because specialists often invest in top-line solutions.

Furthermore, your partner takes responsibility for generating and distributing payslips to your employees, frequently in electronic format for ease of access.

Many providers also manage statutory payments such as Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP).

You can also expect them to handle year-end requirements, such as P60 forms.

Beyond processing, some providers also offer services such as keeping payroll records on your behalf and may even provide support in creating a payroll numbers system for your employees.

They are also a point of contact for your employees’ pay-related queries.

Pros and cons of outsourcing your payroll

Simply having someone take care of the above actions is attractive in itself.

But there are several other practical considerations behind the decision to seek help in managing payroll.

Pros:

• Risk reduction: reduced risk of errors, including penalties associated with non-compliance. Expert partners are much better placed to stay informed about changes in payroll legislation, so their clients are always in compliance.
• Saving time: frees up your internal team to focus on strategic initiatives and revenue-generating activities.
• Expertise: access to specialised technology and expertise that can streamline and perfect processes.
• Potential savings: likely cost reduction in the long run due to avoiding errors and bypassing the need for extensive internal training.
• Scalability: growing businesses, or those with complex needs, can leverage external knowledge and technology without significant internal investment.

Cons:

• Cost: a possible concern for some businesses compared to the cost of internal management (though this should be weighed against potential savings).
• Ownership: may lead to a perceived loss of direct control over the payroll process (mitigated by choosing a reputable provider and by maintaining clear communication).
• Communication delays: there might be potential delays in getting in touch with your designated payroll contact to resolve queries or issues. For example, you are dependent on them if you need to make ad-hoc additions or adjust the software’s configuration.
• Security: requires careful consideration of data security because payroll involves highly sensitive employee information. A breach could lead to significant financial, reputational, and legal consequences. Mitigated by software that checks for compliance with data protection laws such as GDPR.

Benefits of DIY, in-house payroll management

For some businesses, particularly very small startups with straightforward payroll needs, keeping payroll management in-house can be preferable.

It provides direct control over every aspect of the process and can feel more personal, which improves staff retention and motivation.

A hybrid approach can also be effective. You might choose to manage day-to-day payroll tasks in-house using software, but outsource more complex or time-consuming elements.

For example, you may be better off entrusting tasks such as payroll year end or intricate tax situations to external specialists.

This way, you can retain a degree of control while leveraging external expertise when needed.

Choosing the best payroll service provider

Since you’re entrusting an important part of your business to an external party, it’s worth making a special effort to select the payroll service provider that best fits your needs.

Consider your business size, the complexity of your payroll operation, and your budget.

Are your shortlisted service providers equipped to handle your current scale and future growth?

Also, check whether they have experience working in your industry as this can indicate a better understanding of your unique needs and potential challenges.

Look for providers with a strong reputation for accuracy, reliability, and compliance.

Verify their security protocols and ensure they align with your data protection requirements. Accreditations such as ISO certifications (e.g., ISO 27001 for information security) can provide assurance of their commitment to standards.

Consider whether the provider favours a cloud-based option. Cloud payroll software facilitates accessibility from anywhere with an internet connection, which is particularly beneficial for businesses with remote teams.

Finally, assess the ease of integration with your existing accounting or HR software.

Seamless integration:

• Ensures the right data is used
• Reduces manual data entry
• Improves overall efficiency across your business systems.

It’s also wise to ask for references and compare pricing structures to find a provider that offers the best value for your business.

Online reviews are a good source for evaluating service providers’ track record for customer support and communication.

Final thoughts

Deciding how to manage payroll is a key consideration for any business, especially new ventures. Outsourcing offers a compelling solution for many, allowing you to offload the complexities and potential pitfalls to specialists.

By carefully evaluating your needs and choosing the right provider, you can gain valuable time and peace of mind.

Ultimately, the ideal provider will act as a trusted partner, allowing you to focus on growing your business with the assurance that your payroll is in expert hands.