Outsourcing Payroll for Companies

In the last 10 years, outsourcing payroll has been gaining popularity not only amongst small business but larger corporations as well. This trend has been mostly due to changes in payroll legislation and the significant improvement in efficiency and cost-effectiveness of payroll services.

In the UK, the number of businesses outsourcing payroll rose significantly after the legislative changes made in 2013. That year, the HMRC introduced RTI (Real Time Information) to the PAYE system (Pay as You Earn). For employers this means that tax deductions and reports have to be submitted each time an employee is paid, rather than just at the end of the year.

This change complicated the payroll process significantly and led to a proliferation in the market for payroll outsourcing. Before deciding whether outsourcing payroll is for you, the advantages and disadvantages of payroll services have to be weighted.

Outsourcing payroll is becoming more common not only in the UK, but on a global level. Deloitte reports that 47% of organizations in Europe, Middle East and Africa (EMEA) are outsourcing payroll completely.

Moreover, nearly all organizations outsource some part of their payroll operations in order to reduce cost and administrative tasks. The majority of industries taking advantage of outsourcing payroll are manufacturing, retail, life sciences and healthcare.

Payroll service providers are companies that can take over your payroll management responsibilities partially or completely. They will calculate any taxes, additional payments like statutory or maternity pay, and pay HMRC on your behalf. Outsourcing payroll may also free you from printing payslips and dealing with record keeping.

Payroll services are not to be confused with umbrella companies, which are also very common in the UK. Umbrella companies act as employers to agency contractors. Contractors will submit their hours and expenses to the umbrella company, who after making the necessary deduction will invoice the agency and sent the contractors their payslips.

Besides outsourcing payroll you can also opt to hire an in-house payroll manager to take care of all payroll processing. Keep in mind that the person you choose to fill the position will have access to confidential information and will carry the responsibility for all your employees’ payments. When picking the right candidate for the job, reliability and trust are of the utmost importance.

Furthermore, entrusting an in-house payroll manager with all payroll processing makes you completely dependent on him/her. What does it mean for your business in case your payroll manager suddenly quits or takes an unexpected leave of absence? Your business operations must continue as planned for everything to run smoothly.

If you are still not sure whether to outsource or keep all operations in-house, take a look at all the advantages and risks of outsourcing payroll. You can find an overview and a more detailed discussion below.

By outsourcing payroll you can actually save a lot of money. Instead of paying for courses to train employees on payroll management and expensive payroll software that requires maintenance, you can have professionals do your payroll for a standard fee.

Outsourcing payroll will further allow you to streamline your whole budget by reducing your payroll costs to one single fee.

Outsourcing payroll will free up time and resources for developing your main business competences. Especially in the initial phases of building a company, your focus should be on creating differentiation from your competitors and not on mundane administrative tasks.

Some payroll providers even offer online payroll services. This means you will get mobile access to all files, so that you can check your payroll information on a tablet or smartphone wherever you are. If you often work outside the office or go on business trips, online payroll might be the optimal solution for you.

Why burden yourself with extra paperwork when somebody can take it off your hands? Payroll service providers will make sure that every document is filed on time and archived correctly in accordance with the latest payroll legislation. In other words, outsourcing payroll will save you from a lot of sleepless nights. 

Certain employment contracts can lead to complex payroll structures that only experienced payroll managers will be familiar with. Payroll companies can draw on a lot more resources and refer to past cases to solve your payroll problem in record time.

Outsourcing payroll means you won’t have to worry about dealing with expensive payroll mistakes once the next HMRC inspection comes around.

Any changes in HMRC regulations inevitably come with extra cost for training staff and rearranging operations. After the changes in 2013, many employers have recognised the advantages of outsourcing payroll, and have switched to external payroll managers.

Because payroll services is the core business of payroll companies, you can be sure that they will stay up-to-date with any changes in payroll legislation that might occur.

Many payroll providers offer HR management support in addition to payroll services. This way you can gain access to valuable HRIS through your payroll manager without having to buy or maintain it. As both payroll and HR deal with employee management, it makes sense to integrate these tasks into one and streamline operations.

When outsourcing payroll you should think long-term. Are you, for example, considering to expand your business internationally? If yes, have you thought about how this will affect your payroll management? A multinational company requires a payroll manager with clear understanding for payroll legislation and regulations in all countries of interest.

A global payroll service provider with partners across the world will be able to support your company as it grows and will ensure consistent quality of service regardless of the location.

We have discussed the most important advantages of outsourcing payroll above. But before committing to a payroll service provider there are a few more things to consider.

In the UK, every employer is required to calculate tax and National Insurance contribution on behalf of their employees and transfer it to the HMRC. The responsibility of submitting correct and timely information always lies with the employer. In case of error, the employer is liable to pay any fines. This holds true, even if the employer is outsourcing payroll and the payroll company is submitting all information on the employer's behalf.

This fact might discourage some employers from outsourcing payroll. However, unless your internal payroll manager has as much experience as any payroll professional, the chances of committing errors in-house are much higher than by outsourcing payroll.

Many employers are afraid that outsourcing payroll will take away their control over a big portion of the business. Further, because payroll companies work with more than one client at a time, nobody will be prioritised. This may sometimes lead to delays or misunderstandings.

These problems may be offset by establishing good relations with your payroll manager from the very beginning. Good relationship management will facilitate exchange of knowledge and information and will help create a strong partnership that you can count on.

Admittedly, by outsourcing payroll you are sharing your employees’ personal information like National Insurance numbers with a third party, which puts them at risk of fraud. However, outsourcing payroll does not necessarily make you more vulnerable to security breaches.

A reputable payroll provider puts the security of his clients first, because his own business depends on it. He has as much interest in protecting your data as you.

Entrusting your payroll information in the hands of a specialist might even be the better option as payroll providers invest in the latest technology to ensure data security.

Small to medium sized businesses would draw the greatest advantages of outsourcing payroll. Cutting down the never ending paperwork and concentrating on revenue-generating activities will allow small businesses to compete with larger companies.

The time and money you can save by outsourcing payroll, not to mention the stress and headaches, are worth considering payroll services.

Before outsourcing payroll, you should shop around and consider whether you need complete or partial payroll services. You should also check if an Auto Enrolment pension scheme is included. Or maybe you want incorporate a HRIS system? Take your time to review all possible features and providers.

Furthermore, make sure to pick a payroll service provider that you can trust with all your confidential information and who understands the unique characteristics and requirements of your business.

In conclusion, when it comes to non-core business functions like payroll management, outsourcing is most definitely a viable option. More often than not, the advantages of outsourcing payroll will outweigh the costs.