The Pros and Cons of Outsourcing Your Payroll

Payroll is vital for keeping your business running smoothly, but it can often be a time-consuming and complex task for organisations that process payroll in house. Many businesses now opt to outsource this function to a third party and remove themselves from the handling of this administration task. In 2019, 12% of businesses worldwide fully outsourced their payroll function, but this number is on the rise.

So what are the pros and cons of outsourcing your payroll? We’ll take a deeper look into payroll outsourcing to discover the benefits and drawbacks.

What does outsourcing payroll mean?

Outsourcing payroll is when a business hires an individual or organisation that specialises in external payroll services to handle all of its payroll-related activities. The external party would be responsible for all payroll processing including paying wages, filing reports, handling auto-enrolment into a pension scheme, and paying taxes to HMRC

Businesses outsource the payroll process for a number of reasons. Most companies opt to outsource this function to save time, while small businesses can also benefit by dodging costly payroll system fees. Many payroll outsourcing companies also offer other HR services, which can be a huge help for small companies. 

Read more: The 5 best HR outsourcing services to help small businesses

Pros and cons of outsourcing payroll

Outsourcing the payroll process can offer businesses the opportunity to remove a key function from their list of tasks, but it can come with risks. It’s important to weigh up the pros and cons before making a decision to hire an outsourcing service. 

Pro: Time-saving

The biggest advantage of outsourcing payroll is the amount of time a business can save by doing so. Organisations with an in-house payroll team often spend a huge chunk of time processing payroll each week or month. 

One study found that small businesses were spending five hours on payroll each pay period. For small businesses in particular, this amount of time could be much better spent elsewhere. By outsourcing, companies can get their time back to spend on more business-related tasks. 

Pro: Experience

If you’re outsourcing your payroll, chances are you’ll be outsourcing to an individual or company with plenty of experience. This provides the business with peace of mind that the payroll will be processed accurately and on time, with the correct taxes paid to HMRC and all reports completed where necessary. 

Even with the right expertise, there are strict accountancy, payroll tax and PAYE guidelines that should be adhered to. Our guide to making tax simple can help give you the knowledge you need when working with an outsourced payroll company. 

Pro: Cost-efficient

Keeping your payroll function in-house can be costly, especially for small businesses that don’t have a large chunk of cash to spend on expensive software or equipment. By outsourcing to a payroll company, businesses remove the costs of buying payroll equipment and hiring or training staff. 

Payroll outsourcing companies will usually be able to offer you a cheaper price than if you were to buy your own equipment because they will be using their software for a number of businesses. The cost of outsourcing will differ depending on your needs, but as a guide, you could be looking at £2 to £6 per employee per month.

Pro: Ease of paying internationally

If your business has staff based overseas, international payroll outsourcing is essential. Paying employees based abroad comes with an additional set of challenges to UK payroll, but organisations specialising in international payroll services have the experience to deal with them. 

These organisations offer a global payroll service that ensures your staff are paid accurately, regardless of their location. By outsourcing to a company with a global payroll solution, you are benefitting from knowledge in international employment regulations, tax regimes, and currencies in different markets. 

Con: Security

A report by OGL Computer found that 81% of SMBs confirmed they had suffered a data breach, with HR and payroll functions being a key target for hackers. When outsourcing payroll functions, organisations will typically need to send their sensitive employee data to a third party and so, naturally, one of the biggest concerns businesses have in doing this is the possibility of security breaches and cyber-attacks.

Checking how well these organisations look after your personal data is paramount, especially if you have more than a single point of contact and regularly send employee information over to different people. 

Con: Loss of control

Handing over control of a key business task is a big deal, especially for small businesses that might only have a handful of employees and are used to functioning in a small team. Businesses could find they have to adjust to different ways of working with their outsourcing company, based on service level agreements and contracts. Your business will no longer be able to ‘nip’ into the payroll office and delay the payroll process to add a missed employee. 

Con: Errors

Although payroll outsourcing companies are experts in their field, this doesn’t mean that things can’t go wrong. The risk of employing a third party to complete your payroll processing is that they could make mistakes in data entry that end up costing you financially. Although thankfully this is very rare.

One of the advantages of in-house payroll processing is that you know how things should be done correctly and in a way that works for your business. 

How to outsource payroll

Now we’ve gone over in-house payroll versus outsourcing, you might be wondering how you can start the process of outsourcing your payroll function. The first step is to look for online services or local payroll companies in your area and do some research into which organisations might be the best fit for your business. 

It’s important to ensure you hire the right company, so speaking with a few different vendors is essential. You might also wish to speak to other businesses in your market to gather recommendations.

As with any business function, there are advantages and disadvantages to both in-house and outsourced payroll systems. If outsourcing your payroll isn’t for you, but you’d like support in other areas, our business concierge service might be able to help.

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Your complete business toolkit

Rovva puts everything you need for your business in one place. From an accountancy helpline to a drop-in business lounge - we've got everything covered.