Is outsourcing payroll the better option?

Small to medium sized companies have more options when it comes to payroll management. Whilst the natural instinct for most business owners is to save as much money as possible, we weigh out the options and explain how outsourcing payroll can be the most efficient overall.

Option 1 – do it yourself

This is of course the cheapest option. If you have a very small company with only one or two employees, this could well be manageable. You will have to be prepared to adhere to strict deadlines, ensuring you report all payroll submission in RTI (real time information) to HMRC and be confident in calculating the correct figures for deductions such as for workplace pension auto-enrolment and national insurance. We’ve provided some helpful guidance on how to run payroll yourself.

Whilst this is undeniably more cost effective than outsourcing payroll, it is important to consider if it is a good use of your time. For those who find themselves getting bogged down with the administrative tasks, you may notice that you are sacrificing too much time or squeezing in too little time. Not only that, but you should factor in potential costs such as whether or not you will need payroll software, time it takes to become familiar with using new software and how you will manage if there is no support or training. In the worst case scenario, should there be any mistakes, you will have to face paying out fines issued by HMRC.

Option 2 – hire someone in-house

For some business owners, understandably, the biggest worry is about getting payroll done correctly. It’s a significant responsibility and impacts not only the company if mistakes are made, but also the employees. You may decide to hire someone else to take on this responsibility, such as a skilled bookkeeper, and this way you can retain control over payroll in-house. This is beneficial if you need to make a lot of last minute changes to payroll such as where employees have worked extra hours. It allows you to have access to payroll information quicker than if you were outsourcing payroll and employees may prefer to speak to someone directly within the company if they have questions regarding their pay.

However, with this option there are several factors you should bear in mind. Firstly that you will have to pay an additional salary, and if that’s full time then that’s a cost of at least £20,319 on minimum wage (calculated based on 37.5 hours per week at the 2023 minimum wage rate for those 23+). With payroll expertise, it is likely that you will have to offer a salary more than this unless the position is part-time.

To justify the cost of hiring internally as opposed to outsourcing payroll, you should think about the number of people in your team and the complexity of their pay. If you have a lot of people who all get paid different salaries and in different ways (e.g. hourly, weekly, bi-weekly, monthly etc) then this could well justify having an internal person who will be able to keep on top of things, cross check and make changes quickly.

Asides from salary, you should think about other benefits that you as a business owner will have to provide. Almost all employees will be entitled to a workplace pension and you will have to pay national insurance contributions. On top of that, do not forget about your statutory obligation to provide annual leave, sick leave, maternity leave etc. This will mean that you will have to put plans in place for any absences, ensuring staff are still paid on time. You will also want to think about the costs of development, training, software and materials such as the payslips themselves. As payroll legislation is always changing, ongoing training will need to be provided to ensure the payroll employee is kept up to date with the latest rules.

Option 3 – outsourcing payroll

The decision as to whether outsourcing payroll is the best option will be dependent on your priorities as a business owner. If you have concerns about retaining control and privacy then this may not be the best choice for you.

One of the biggest benefits of outsourcing payroll however, is peace of mind. When you use professionals, you know that your payroll will always be calculated correctly and on time. Furthermore, if you choose to use chartered accountants to complete your payroll, then you know that they will always maintain a high standard of practice because their accreditation is issued by an official governing body. Chartered accountants are required to continue ongoing professional development which guarantees that they will always be up to date with legislative changes.

Outsourcing payroll is the best option when it comes to time efficiency. If you do payroll yourself, it can be time consuming. Passing it onto an accountant means you can dedicate your time to running your business and focus on your priorities. On the other hand, if you have an internal member of staff completing payroll, you should consider the time you need to set aside for managing another person. Depending on their experience, an accountant could still be much faster at running payroll. You’ll also never have to worry about absences.

Cost of course is a big consideration, but if we use the example of an annual salary above, opting to outsource should come in at significantly less. As a general rule, when looking for which accountants to use to handle your payroll you should think about whether they are a good fit for your company. If you use a sole trader, will they be able to cope with the number of staff you employ? If you go with a large firm, will they able to provide a competitive quote which is value for money? Don’t forget that if you are outsourcing payroll, you are paying for a service, so make sure you look around for the best provider that you’d be happy to work with.

The most important thing to remember, that as a small to medium sized business owner, the power is very much in your hands. You may want to try all options (and not necessarily in the order we’ve outlined) to see which one works best for your business.