In-house payroll vs outsourced payroll
Paying employees accurately and on time is imperative for any business. The question is: what is the best way to do it? Do you build a team of in-house experts and use payroll software, or do you outsource your entire payroll function to a specialist payroll provider?
All businesses will agree that payroll is a complex process involving accounting and compliance. But it is so much more than simply writing cheques for employees. It is subject to ever-changing regulatory and statutory requirements and must follow strict UK GDPR rules.
The fact is most businesses will be faced with the option of outsourcing their payroll function or keeping it in-house. Each model has its pros and cons and is popular amongst many businesses. So, which do you choose?
Today, we look at the advantages and disadvantages of in-house payroll versus outsourcing payroll and how to make the best choice for your business.
What is in-house payroll?
In-house payroll is where an internal department of a business looks after the entire payroll process for all employees within that organisation. The staff who manage the process are also employees themselves and usually sit within HR or finance functions.
An in-house payroll team will commonly use payroll software to prepare and check all payroll data before calculating and actioning a pay run. Historically, it would have been done using a paper process, however, most modern companies will use some form of software. This process also involves paying the correct amount of salary, bonuses, tax contributions, pension payments, National Insurance and more. Payroll will also need to submit information to the government regarding National Insurance contributions for example.
In-house payroll processing teams are required to be fully trained and compliant with the latest payroll rules and regulations. Lapses in these can result in late staff payments and even fines and penalties from HMRC.
What are the advantages of in-house payroll?
Having your own in-house payroll department can provide greater flexibility and control around the payroll function for a number of reasons. While it is likely that the size of your business will be a key factor in your decision to keep your payroll in-house or to outsource, there are some essential points to consider.
Running payroll in-house with specialist payroll software has the following advantages:
1. Control over payroll
Perhaps the biggest advantage of in-house payroll is the greater control and management you have over the process. This way, your team can have direct input into developing a system that is perfectly matched to the specific needs of your business.
Accessing payroll history and vital information is also likely to be easier when you have control of your payroll. It means your finance department and qualified accountants can check for any weak points in the system and identify where tax savings could be made, for example.
On the other hand, when you outsource this work to a payroll provider, you may need to adjust your process and compromise on certain features to meet their standard work practices.
2. Flexibility over payroll
Another key benefit of in-house payroll is that it allows you to react quickly to staff and company changes or when issues arise around compliance rather than wait for an outsourced payroll provider to respond. Changes to staff details and processes or last-minute alterations to salaries, bonuses and deductions can be made almost instantly rather than having to connect with a third-party provider.
Therefore, maximum flexibility is crucial to ensuring that salaries and other payments to employees are made on time. An outsourced provider may not have this degree of flexibility around late changes which could result in supplementary payroll runs and additional fees.
3. Accuracy over payroll
A third-party payroll provider is only as good as the information they are given. Errors can occur when client companies fail to communicate properly with their payroll provider.
Mistakes in the payroll process can damage staff morale and lead to penalties from HMRC. Processing payroll in-house provides you with better access to data from HR and finance departments so that little or no inaccuracies in pay ever occur. It also means in-house payroll will avoid additional charges for rectifying mistakes that an outsourced payroll provider may demand and also save the time of correcting any errors.
What are the disadvantages of In-house payroll?
There are many benefits to using in-house payroll, but equally, there are some drawbacks. Here are some of the common problems an in-house payroll team could face:
1. Time and money heavy
Hiring staff is one of the biggest expenses for any business when you factor in salaries and onboarding costs. Unsurprisingly, these costs often mean some businesses simply can’t afford to employ dedicated payroll staff even on a part-time basis.
Another drawback is the amount of time required to run a compliant payroll process. Payroll staff will need specialist training and support and some businesses may not have the resources to add this to their list of daily tasks.
2. Software integration problems
In-house payroll teams will need specialist software for the smooth running of the overall payroll function. However, payroll can be a complex system to set up because it is often tied to numerous other HR functions including time tracking, health benefits and diary scheduling.
Difficulties can occur when attempting to configure and integrate these systems which again can take up valuable office time. The best payroll software providers tackle these challenges by using systems that seamlessly sync payroll software with other vital business applications.
3. Staying compliant
In-house payroll handles vast amounts of private information and employee data including bank accounts, email addresses, National Insurance numbers, birthdays, and other sensitive details.
Therefore, compliance and accuracy are of paramount importance. Protecting this data in line with the latest UK GDPR and data protection rules is essential for in-house payroll processing. As a result, businesses must ensure their payroll staff are fully trained and up to date with compliance and data protection laws which can be an unwanted but necessary burden.
What is outsourcing payroll?
With so many layers of compliance, tax and legal requirements to follow, the process of managing employee payroll is often time-consuming and can be expensive. These are two of the main reasons why organisations may choose to hire another company and outsource their payroll function.
Sometimes businesses simply lack the time and resources to employ their dedicated payroll staff. In such cases, outsourcing payroll can be a practical and attractive option. An external payroll provider is likely to provide a range of services including an account manager, online payments, payslip distribution, in-depth reporting, data processing and much more.
When you outsource payroll, you hire another specialist company to manage part or all of your payroll process. They will make pay calculations and deductions on your behalf and stay in line with all tax and employment legislation.
The best outsourced payroll provider will feel like an extension of your own business and can save you time and money. Typically, you won’t need to employ and train your own payroll staff and invest in payroll software to manage the payroll process, nor will you be required to keep up to date with the latest payroll regulations – your payroll partner will take care of everything on your behalf.
What are the advantages of outsourcing payroll?
1. Fewer compliance concerns
Staying on top of payroll compliance and best practices can be a challenge. It is essential to ensure that pay adjustments are made accurately when employees move positions, change their working hours, or take a sabbatical, for example. There could be freelancers and contractors to pay, pension contributions to calculate and tax deductions to make.
Outsourcing payroll can help reduce compliance issues. Specialist accounting and payroll companies will be educated in the latest payroll rules and regulations. This takes away the stress of incorrect payroll reporting which can result in significant penalties from HMRC.
2. Reduced costs
Payroll outsourcing to a trusted company is generally considered to be a cheaper option than managing the process in-house. This is often especially true for small to medium-sized businesses as the cost of employing and training in-house payroll staff is likely to outweigh the cost of outsourcing.
3. Saves on time
Payroll outsourcing can not only lead to reductions in spending, but it can also save you valuable time. Running compliant payroll can eat up resources as the process requires a great deal of time and attention to eliminate the possibility of errors. Outsourcing to a payroll provider with in-depth knowledge of payroll compliance can increase efficiency by enabling your staff to invest time elsewhere.
An added benefit of outsourcing is that it eliminates the sense of panic that may occur when in-house teams are rushing to meet payment deadlines. This, in turn, will also reduce the potential for errors and costly mistakes which could result in significant fines.
4. Enhanced data security
Companies hold vast amounts of sensitive data and private information about their employees. In-house payroll processing could put this data at a higher security risk as this personal information could be seen by an office colleague or shared among the workforce for example.
A specialist outsourcing payroll provider is likely to have strong cybersecurity measures in place and use secure servers so that confidential employee data is not compromised and does not fall into the hands of cybercriminals.
Another benefit of payroll outsourcing is that the company you use will have a reliable backup and data recovery system in place so that information is stored in multiple locations and can be recovered in cases of disaster. When payroll is run internally and on internal payroll software there is always a chance that employee data may be lost should systems fail or a disaster such as fire or flood affect your office. However, cloud-based software will help to mitigate this risk.
5. Access to payroll professionals and specialist software
Outsourcing will give your company access to the very latest payroll software and highly- skilled professionals specifically trained to use the software and educated in all payroll processes and compliance. This can save time often associated with training staff to use new software.
6. Increased reliability
In-house payroll teams are no different to other business departments in that staff take time off for holidays and sickness and move jobs. However, problems can arise when these clash with payroll runs which could result in workers being paid late, cause frustration and unrest and even lead to fines.
Payroll outsourcing eliminates the risk of untimely staff absences as your business will not be affected by holidays and sickness and your payroll will be guaranteed to run on time.
What are the disadvantages of outsourcing payroll?
Payroll outsourcing involves some elements which businesses should be aware of before entrusting their payroll provision to a third party.
1. Less control over payroll
By outsourcing payroll, you may be agreeing to give up some level of control of the payroll process and information accessibility. While a business can continually monitor the performance of its external payroll provider, it is unlikely to provide the same degree of insight that can be achieved when payroll is run in-house.
A good example is when a company remains responsible for a late tax return even though it was their external payroll provider who submitted them after the deadline. However, finding a trusted payroll provider goes a long way to eradicate these concerns.
2. Challenges with coordination
While it is true that outsourcing payroll can save a business time and money, businesses will still need to set time aside to liaise and meet with their payroll provider so that communication lines are clear, and targets and results are closely analysed. However, an experienced payroll provider will be flexible around time and will generally work around a client’s schedule.
3. Reduced scalability
Payroll is an important part of a company’s growth strategy. Adding or removing employees from a payroll function should be a quick and simple process. Using an outsourced payroll provider to do this for you is likely to take longer than it would with an agile, in-house payroll team which can react quickly to staff changes. However, the most effective cloud-based payroll solutions make it easy for businesses to scale up or down, add new technology and share information.
4. Lack of expertise
Managing payroll requires a detailed understanding of a company’s entire payroll and HR function. But how do you know your new outsourced payroll provider has the required level of knowledge and experience to run payroll for you? Is their understanding of processing, filing, statutory payments, benefits, and sector-specific regulations as in-depth as yours? It is essential to conduct thorough research on outsourced payroll providers to find out if their expertise matches your expectations.
5. Data security concerns
An outsourced payroll provider must be GDPR compliant and have systems in place to guarantee the safe storage and transfer of data and personal information that are vulnerable to cyberattacks. While this should be the case for every company and can present itself as a huge advantage when in place, if there is a failure to comply, this can be damaging. Security breaches are costly to rectify and are likely to cause damage to a company’s reputation.
In-house payroll or outsourced payroll?
Some businesses will find handling payroll responsibilities and its complexities overwhelming and lack the resources to run the function properly. These are likely to outsource payroll to an external provider.
Other businesses will have the capacity to deliver payroll in-house so they can keep tighter control of the process and stay on top of changes in staffing and legislation. These are likely to employ their own in-house payroll team.
There are pros and cons to both payroll solutions, and companies should always weigh up all options before deciding which approach to payroll suits their business needs the best. Whichever option works best for you, we have a solution. If you want to run your payroll yourself, we have Staffology Payroll. Or if you want to outsource, we have a Managed Payroll solution.
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