From Cost Savings to Compliance: Why Outsource Your Payroll?

Imagine a world where you can delegate the complex tasks of payroll administration and compliance to a trusted third-party organisation. This is the essence of payroll outsourcing. It involves maintaining employee records, calculating salaries and wages, computing bonuses, generating payroll reports, managing pension deductions, administering company benefits, and ensuring compliance with applicable taxation laws within the countries in which you operate. This approach not only saves time and costs but also reduces the need for in-house payroll staff and eliminates the need to purchase and maintain your own payroll software solutions.

The demand for payroll outsourcing is on the rise, fuelled by the increasing complexities and fast-paced changes in payroll. Advanced technologies, such as cloud computing and business analytics, streamline workflows and provide valuable insights, significantly reducing the operational burden on organisations. Managed payroll companies are adept at leveraging these technologies, including AI, to configure software solutions that meet clients' specific needs, making payroll processes more efficient and effective.

Payroll outsourcing is a prevalent HR practice, with global statistics reflecting its adoption. In 2019, 12% of organisations worldwide fully outsourced payroll functions, while 26% opted for co-outsourcing, as reported by Statista in 2022. Specifically in the UK, the trend was even more pronounced, with 61% of British businesses outsourcing their payroll in the same year, according to the 'Genius Outsourcing Statistics UK, 2024'. This global prevalence not only reassures the effectiveness and reliability of payroll outsourcing but also instils confidence in its benefits.

Comparing outsourcing models

When it comes to outsourced payroll services, there are primarily two types: fully managed and part-managed (or co-managed). Each type offers its own set of advantages, and understanding these can help you choose the one that best suits your organisation's needs.

A fully managed payroll service

This involves entrusting all your payroll functions to a third-party provider. The service provider will oversee your entire payroll process from start to finish, reducing the need for you to invest significant time, effort, resources or attention in your payroll. This approach is not limited by the size of your business and is utilised across various industries, making it a suitable option for all.

A part-managed payroll service

In contrast, this allows you to outsource select aspects of your payroll while retaining control over others. You maintain oversight of routine tasks, such as managing employee records and updating wage details, with your payroll provider assuming responsibility for the more complex tasks, such as ensuring HMRC compliance and filing year-end reports. This approach enables companies to manage the quality of the payroll process while reducing costs. It combines the benefits of an in-house structure with those of external outsourcing, thereby streamlining and improving the payroll process.

Understanding the cost landscape of payroll outsourcing

The cost of outsourcing your payroll generally includes all expenses associated with compensating your employees, comprising salaries, payroll taxes, and administrative fees. When you outsource to a payroll provider, you're entrusting them to ensure timely payment to your employees, handle HMRC submissions, and maintain compliance for your organisation.

The cost of outsourcing your payroll will depend on the size of your business and how frequently you pay your employees. Outsourced payroll services are typically priced on a monthly basis and determined by the number of employees (it is often based on the number of payslips issued) and the frequency of payroll processing. For instance, managing a weekly payroll incurs higher costs compared to monthly payments.

Based on pricing from different outsourced payroll providers, monthly costs typically range from £4 to £10 per employee (excluding set-up fees). Naturally, quotes can vary significantly based on the total number of employees and the complexity of the payroll. Smaller firms with fewer than ten employees may need to allocate a higher amount per employee compared to larger firms with hundreds or thousands of workers.

According to Expert Market, outsourcing payroll costs generally vary from £2 to £25 per employee per month. Specifically, Fully Managed services typically range from £4 to £25 per employee per month, while Part Managed services are typically around £2 to £3 per employee per month. Additional payroll services, such as integrated HR and pension plan auto-enrolment, may involve slightly higher fees.

For most organisations, managing payroll is a time-consuming, detail-oriented process. Each pay period requires calculating wages, deducting taxes, ensuring compliance with numerous HMRC regulations, and disbursing payments to employees. Errors in payroll can lead to penalties, strained employee relationships, and potential legal issues, underscoring the benefits of outsourcing this critical function.

What are the benefits of Payroll Outsourcing?

Cost Savings

Many companies opt to outsource payroll due to its cost-effectiveness compared to managing it internally. Outsourced payroll offers secure and affordable services that comply with HMRC requirements, a longstanding motivation for outsourcing this function.

According to a PwC study, businesses conducting payroll internally spend an average of 18% more than those outsourcing it. Outsourcing allows organisations to eliminate expensive tasks such as software updates, resource investments, and ongoing training.

Handling payroll internally can be even more costly for small to medium-sized businesses when factoring in employee wages and benefits. Outsourcing alleviates concerns about payroll staff availability, including issues like sick leave, resignations, vacations, or maternity leave costs. It also ensures confidentiality, mitigating potential workplace conflicts stemming from salary disclosure.

Outsourcing payroll activities also frees up organisational time to focus on core business activities. It eliminates the need to train in-house payroll staff and reduces expenses associated with purchasing and maintaining a costly payroll system.

Given these benefits, it's increasingly common for UK businesses to explore payroll outsourcing primarily for its cost-saving advantages.

Avoid HMRC Penalties / Costly errors

Ensuring compliance with constantly evolving legislation has become a significant responsibility for outsourced payroll solutions.

It’s easy to underestimate the importance of timely and accurate payroll reporting, but the consequences of errors can be more severe than anticipated. Since 2020, HMRC has imposed over £75 million in payroll penalties on UK businesses for inaccurate or late reporting, with a substantial portion (27%) occurring during the 2022-23 financial year alone. For businesses neglecting payroll deadlines, this serves as a critical reminder to take proactive steps to maintain compliance and avoid penalties.

Incorrect or late filing of payroll reports can lead to substantial financial penalties from HMRC, including:

• Penalties for late, incorrect, or missing returns
• Costly fines for delayed payments
• Increased risk of HMRC investigations

Late filing penalties can be particularly burdensome and impact a business’s financial stability significantly. Avoiding these risks is crucial—it’s always better to prioritise compliance to prevent costly repercussions. Furthermore, penalties for careless or deliberate errors in payroll reporting are determined based on the severity and potential revenue loss for each return

Common mistakes leading to payroll penalties include:

• Failure to report payroll changes promptly
• Missing filing deadlines
• Submitting inaccurate or incomplete employee data
• Delayed payments to employees without necessary deductions
• Incorrect submission of PAYE tax and National Insurance contributions

These examples underscore the importance of staying updated on payroll regulations and ensuring timely and accurate reporting. Working with a payroll outsourcing provider can be advantageous, as they are well-versed in HMRC regulations and equipped with the expertise and processes necessary to ensure accurate and timely payroll processing and reporting.

Productivity

Managing payroll internally is not only time-consuming but also a significant drain on business resources. According to studies by Technology Advice, 26% of small businesses spend approximately 5 hours per month manually processing payroll. This process involves time-consuming, detail-oriented tasks such as tracking benefit deductions, managing pension payments, handling new hires, terminations, and paid time off, all while staying abreast of ever-changing HMRC regulations.

Outsourcing payroll streamlines operations and allows HR and financial professionals to dedicate more time to strategic initiatives within their core business activities. Whether managing a small team or a large workforce, payroll processing demands substantial time and attention. Each pay period requires inputting large volumes of data and rigorous error checking, diverting attention from critical management responsibilities.

The repetitive nature of payroll tasks further detracts from key management personnel's daily productivity. Outsourcing payroll immediately alleviates this burden, freeing up valuable time. Instead of being immersed in the details of payroll processing, employers simply need to approve time entries with their outsourced payroll specialists each pay period.

Moreover, rapid advancements in technology necessitate regular updates to payroll software and systems for efficiency and compliance. These updates can be complex and time-consuming for businesses to manage internally. Outsourcing payroll allows companies to delegate these responsibilities to specialised providers, further optimising time and resources.

Delegating to the professionals

Outsourcing payroll allows specialised providers to handle this crucial function efficiently. For most companies, managing payroll internally is a necessary but distinct task from their core expertise. In contrast, a dedicated payroll outsourcing provider focuses solely on payroll functions. Even if they offer additional services, these typically align closely with payroll management.

This specialisation ensures that payroll outsourcing providers bring extensive experience and effective management systems to handle all aspects of payroll. They employ staff trained specifically for payroll tasks and maintain comprehensive software solutions.

While the quality of payroll outsourcing services can vary, many companies find third-party payroll managers more effective than internal operations. The expertise offered helps mitigate risks associated with HMRC errors or regulatory compliance, which can be both time-consuming and costly to rectify. This makes outsourcing payroll particularly advantageous for companies dealing with complex and demanding payroll requirements.

Ensuring Payroll is run correctly

Using an outsourced provider for payroll can significantly reduce errors and ensure employees are paid correctly and on time, which is essential for maintaining employee productivity, commitment, and retention. Payroll inaccuracies can have severe consequences, with nearly half (46%) of UK employees reporting they have missed a bill payment due to payroll errors. A survey by the Global Payroll Association of 4,248 UK employees revealed that 25% had experienced payroll errors, with 46% encountering these issues more than once. In almost half of these cases, the errors were due to human mistakes in wage calculations. For companies with 500 or more employees, these errors can cost up to £150,000 annually. Leveraging the expertise and advanced technology of an outsourced payroll provider allows companies to streamline payroll processes, ensure accurate payments, and reduce the operational burden of manual payroll management. This not only improves payment accuracy but also boosts employee satisfaction and financial stability​ (HR Magazine).

Critical considerations: Evaluating payroll outsourcing

While payroll outsourcing presents significant advantages, it is not a universal solution for flawless payroll management. Companies should approach the decision to outsource with careful consideration, recognising both its convenience and the potential for financial savings. To make well-informed decisions, it is crucial to have a comprehensive understanding of the benefits and drawbacks of payroll outsourcing, along with precise insights into existing payroll management expenses. Also, consider working with a provider that will integrate with your business systems (e.g. HR, Finance, Workforce Management, Expense systems) to ensure the right data is in the right place with no manual effort to reduce errors and speed up payroll processing.

Discover more

Tugela People offers a comprehensive outsourced payroll service designed to ensure accuracy, compliance, and efficiency. By leveraging advanced technologies and industry expertise, we provide tailored solutions that streamline payroll processes, allowing businesses to focus on their core activities. For more information, visit the  Fully Managed Payroll page on our website or contact us directly on  +44(0)1908 030360 or  info@tugelapeople.com. Alternatively, complete the ‘Get in touch’ form, and a member of our team will contact you.