Finance strategy 4 min read

In-house payroll vs outsourcing: What's right for your company?

Nichola Hailes

Deciding whether to perform specific tasks in-house or outsource them to an external provider is not a new problem. 

Companies across the globe have for years weighed up the pros and cons of both. 

Almost every business function can be outsourced. Whether it’s marketing for support with advertising campaigns, customer service teams to reinforce good practice or a logistics team looking to optimise their processes, the reasons behind the decision are often remarkably similar. 

Generally, companies choose to outsource because they want to reduce costs, focus on core functions, improve service and gain expert knowledge.

One of the most commonly outsourced business services in the UK is payroll. There are several reasons for this:

  1. Payroll is complicated and requires a certain amount of pre-existing knowledge and spare time to manage correctly.
  2. Many companies do not have the resources to perform the task in-house.
  3. They already outsource their finance function and so decide to outsource payroll too.

For years, the choice when it comes to payroll has been either in-house or outsourced. People have rarely looked beyond either of these options and considered an alternative. 

This piece will look at the pros and cons of in-house and outsourced payroll and discuss why the pandemic has led some organisations to consider a more modern approach.

Outsourcing payroll

Outsourcing payroll is beneficial for many businesses – particularly startups, scaleups and SMEs with limited resources. 

The reasons for this are simple. Managing payroll is both time-consuming and manual and eats into the time allocated to more high-value tasks that can impact company success.

Payroll is also extremely complicated, with the rules that govern it continually changing. 

Consequently, staying on top of the latest legislation and remaining compliant is often beyond many businesses' capabilities. 

With this in mind, the natural choice is to do some market research and choose a third party to manage payroll. 

But, as with so many things in life, this doesn't come cheap and is often beyond the budgetary constraints of many businesses

Consequently, the popular choice is to delegate payroll responsibilities to accountants. 

At first glance, this seems a reasonably sensible decision. After all, accountants are likely to manage monthly and annual accounts already and provide financial guidance. 

However, while they may be able to consult, advise and support clients in decision-making processes, their level of payroll expertise and, perhaps more importantly, their flexibility can sometimes be a little limited. 

By choosing accountants or people without a payroll-centric background, companies may be unwittingly leaving themselves exposed to the risk of financial penalties

Although outsourcing can remove the burden of running payroll, it does not remove accountability from employers. Consequently, ensuring that employees are paid accurately and on time will always be the employer's responsibility, irrespective of whether payroll is outsourced to a third party. 

A further problem commonly associated with outsourcing is the loss of access to important company data. There are a couple of reasons for this, both administrative and financial. 

From an administrative perspective, outsourcing can be a slight pain when it comes to auditing accounts and having to request specific payroll reports from the provider. In rare instances, they’ve been known to charge for the privilege!

More seriously, finance managers are likely to want to be able to access crucial company data easily. Payroll is generally the most considerable expense for businesses and outsourcing means visibility and information about costs and month-on-month evolutions can be limited. For companies operating with tightened purse strings, this is something they can ill afford. 

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In-house payroll

So, for businesses that consider visibility important or those that wish to affect how payroll is run and action changes more or less straight away, in-house payroll certainly seems like the way forward. 

However, the problems with in-house payroll are remarkably similar to those associated with outsourcing

We've already highlighted how complex payroll can be and how errors can have serious implications; therefore, absorbing these responsibilities in-house is undoubtedly a risk.

As is the case with outsourcing, the success of in-house payroll depends on who is in charge and the system being used.

If a company is fortunate enough to have a qualified payroll expert on its books, the likelihood of compliance protocols being achieved is undoubtedly higher. But, with only around 10,000 qualified payroll professionals in the UK, supply is limited, and, once again, doesn't come cheap

Finally, how payroll is managed in-house is also likely to impact its success. Payroll systems and processes need to have the flexibility to change and adapt without compromising on compliance. However, many companies remain attached to traditional legacy systems as they know how to use and manage them. 

Unfortunately, these systems are often inefficient and not always up to date to deal with the latest legislative changes. 

Payroll during the pandemic

The complex nature of payroll has perhaps been best demonstrated by events throughout much of the last year. 

Since the COVID-19 pandemic began severely impacting businesses last March, numerous payroll changes have been implemented. Initially, amendments to Statutory Sick Pay (SSP) were introduced, closely followed by the introduction of various iterations of furlough leave through the Coronavirus Job Retention Scheme (CJRS). 

For many businesses, staying on top of all these changes has been a struggle – even the experts have found it challenging! – and has highlighted the need for specialism. 

Traditionally, specialism has meant finding an external provider. However, the financial uncertainty caused by the pandemic has also meant that employers have increasingly favoured having visibility over the way payroll is managed. 

With this in mind, a different sort of service is increasingly in demand – one that can automatically process complex calculations, react quickly to changes in process, provide support and high-level expertise, but has the bonus of control and visibility over the entire payroll process.

A modern, hybrid solution

At PayFit, we offer far more than just HMRC-approved payroll software. We consider ourselves an in-house solution with all the perks you would typically associate with outsourcing.

We aim to support clients with their payroll through dedicated customer support and access to qualified payroll professionals. 

The software has been designed to be intuitive and easy to use. With all calculations automated and any errors identified at the entry point, even people with little or no payroll experience or expertise can confidently use the software. 

Finally, app admins have access to all the information they need, including payslips, customised reports and payroll journals that integrate directly with accounting software. 

Interested in finding out more? Book a demo with one of PayFit's product specialists today.

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Nichola Hailes

Nichola Hailes is CIPP qualified with over 10 years' experience in various payroll roles.