This guide was written by James Proctor, Chief Operating Officer at Phase 3, a digital transformation partner across HR, Payroll and Finance providing high calibre Professional and Managed Services, acting as an extension to your own team.
Every business is unique, but all businesses have a critical responsibility to ensure that staff are paid accurately and on time. They are, after all, the people who turn an organisation’s goals into reality. And there are two ways that payroll can be managed – either in-house, or outsourced.
In this guide, we will explain the difference between the two options, the benefits and pitfalls of each, and what you need to consider before settling on the right path for your business.
All businesses need to pay their staff, and employees expect to be paid accurately and on time. This is a core fundamental of the contract between organisations and employees, and a function of business that you have to execute correctly month after month. Failure to do so will result in disgruntled and unsettled staff, and continued errors can even damage the reputation of a company. In fact, a study by the American Payroll Association found that almost seven in 10 workers would experience acute financial difficulty if their pay was delayed by just one week.
Choosing the right payroll model for your business is key because it directly influences how the payroll process works. Is an in-house team manually processing all employee payments and dealing with all regulatory and legal requirements each month, or is an off-site payroll specialist managing the entire payroll process for you?
Which model your business adopts is based on a number of variables, from budgets and in-house expertise, to company set-up and size. This guide will help to inform your thinking on the right option for your organisation.
The primary difference between managing payroll in-house and outsourcing to a managed service is who is doing the work and shouldering the responsibility. With in-house payroll, a business will use payroll software to calculate and execute payroll each month, with an internal team to manage this process. This ‘software only’ approach relies on the individual business maintaining its own payroll processing expertise and resources, as well as staying abreast of legal and compliance-related employment law updates.
Outsourcing payroll activity, or ‘managed payroll’, sees a qualified third-party execute the entire process, as well as taking on the risk and accountability of ensuring accuracy and legislative compliance.
Both have their benefits and their drawbacks, and the reasons why businesses choose either path varies. We’ll touch more on all of these factors throughout the rest of this guide.
The way payroll is managed between business and third-party specialist varies, but in general there are five key steps:
1. Business signs up with payroll service provider
2. A set-up and onboarding stage is completed
3. Payroll service provider will calculate payments based on timesheets, employee data, PAYE taxes and other country-specific variants
4. Someone within your business will be designated to sign-off on payroll calculators from the service provider
5. A final authorisation step will be completed by your business before the managed payroll provider executes payments each time
I’m sure there will be some immediate benefits that spring to mind when considering managed payroll services – chief amongst them is that you’re outsourcing a key task to a specialist service provider and removing migraine-sized headaches from your monthly to-do list. But there are a host of additional benefits too, including:
For SMEs with just a handful of employees, it may not be financially feasible to hire an in-house specialist or payroll team to manage employee payments each month. Outsourcing to a managed payroll provider will likely be cheaper.
It’s a managed payroll provider’s job to understand payroll and employment law and to stay abreast of any changes as and when they’re legislated. For companies without veteran payroll employees who keep a hawk-like eye on the latest developments, this greatly reduces the risk of falling out of regulatory line or incurring any penalties.
Outsourcing payroll to a specialist company means tapping into their entire pool of expertise and knowledge, and not just relying on one or two in-house payroll specialists (who may also not be available if on holiday or through illness!).
For start-ups and micro-businesses in particular, it’s often left to a single founder or couple of directors to wear all the business hats. Managed payroll removes one critical task from the to-do list to allow focus to return to managing and growing a company.
It’s in a managed service provider’s best interests to offer the best possible service for their customers, and this includes staying abreast of the latest technology. This removes a burden on your company of making sure the payroll software you’re using is fit for purpose.
Many businesses are wary and lack confidence when it comes to data security and compliance – the introduction of GDPR being a great example of this! Most managed payroll providers will ensure employee and related business data is ring fenced on secure and encrypted servers and will work to ensure that your data remains secure with updates and additional security features too.
There are undoubtedly a plethora of fantastic benefits to outsourcing payroll processes, but this path isn’t without some drawbacks too – and there are two primary potentially negative outcomes that you need to consider.
Whilst it’s true that for most small businesses, hiring a dedicated payroll resource or team of specialists will likely cost more than outsourcing, managed payroll will become increasingly expensive as your company grows. This is largely due to their typical pricing models where a charge is applied on a ‘per employee basis’, which can range from £4-6 per payroll processed. If your organisation has 10,000 employees, then your costs could quickly begin to outstrip the PAYE outlay for an inhouse team each month.
Your managed payroll provider will need access to your employee data, and this is typically managed through a third-party system such as QuickBooks. Whilst there are benefits to managed payroll when it comes to employee data, there is always a risk, however small, of a data breach when you’re moving it around and passing it into another system. This is why assessing the security credentials of both the managed payroll provider and their suggested third-party platforms is critical during the discovery and onboarding stage.
Put simply, your business has to do all the work internally and typically involves seven key steps:
1. Creating a payroll bank account where funds can be sent and then withdrawn to pay employees
2. Choosing and adopting a payroll platform to calculate and execute each pay period
3. Depending on how you employ staff, signing up for a time-tracking platform to calculate pay, or in the very least, to assess holidays and time owed
4. Calculate deductions from pay, including National Insurance and Student Loan repayments
5. Calculate the employer’s National Insurance contribution
6. Produce payslips for each employee
7. Report pay and deductions to HMRC in a Full Payment Submission
Whilst on the outset it may seem like there are more negatives than positives to in-housing payroll processes, not least because you’re having to shoulder more responsibility as an organisation, there are a range of benefits that warrant consideration before choosing the right payroll path for you.
Whilst outsourcing payroll for small businesses makes financial sense, the converse is often true for large and enterprise-scale organisations. Whilst the average salary of a payroll clerk in the UK is around £25,000 according to Reed, a managed payroll provider may charge anywhere between £4-6 per employee processed each month. For big firms with a large employee base, it’s typically a lot cheaper to build a payroll department instead.
Last minute changes and working with the systems you already have in place are two of the major benefits of controlling the entire payroll process. Managed payroll providers may be difficult to reach out of standard business hours, so any urgent issues may not be resolved straight away. And as the processes and systems in place are of your organisation’s choosing, you can update and change them when you want.
Just as data security is a potential pitfall of managed payroll, the converse is true for in-housing. Keeping all your employee data under one roof without moving it to a third-party platform for processing ensures it is inherently more secure and reduces the risk of a data breach.
Finally, it’s worth considering that a managed payroll provider will be catering for a raft of clients. Whilst your organisation will be a priority, there’s no guarantee you’ll be top priority – especially if you’re a smaller or mid-sized firm. Managing payroll processes in-house means your teams are completely dedicated to just your organisation. They’ll invest all their time into ensuring accuracy, exploring streamlining opportunities and finding cost-saving avenues too.
From looking at the processes, benefits and drawbacks of both payroll management options, you will always be thinking that one may be better for your business than the other.
But before making your mind up, here are some considerations to mull over and ask yourself before committing to one of the payroll pathways:
1. Does the size of your business warrant hiring a permanent in-house pay clerk?
2. Does your existing people management team have the expertise and time to manage payroll each month?
3. Are you confident your organisation can stay abreast of legislative and compliance changes?
4. Are you nearing a tipping point as your business grows by which it would be more cost-effective to in-house rather than outsource within the short to medium term?
5. Does your business have proprietary processes specific to your company needs that an outsourced partner would likely struggle to adopt?
6. Does your organisation already have a payroll system in place? If so, does it function well, or is it clunky and requires a big potentially expensive upgrade?
7. And finally, would you have greater peace of mind knowing that you were executing payroll internally, or trusting a third party provider to manage it for you?
Hopefully by this point you will have a far clearer understanding of the different payroll models available, the benefits and pitfalls of each, and the questions you need to be asking yourself to help decide which one may best suit your business.
And whichever path you decide to go down, the payroll specialists at Phase 3 can help.
If you opt to manage payroll in-house, then our specialist payroll professional services can augment your own team’s skills by providing additional legislative and technical know-how. We help organisations to select the right software, manage the migration process and provide ongoing or scheduled payroll systems health checks and audits.
If you’d rather take a hands-off approach and leave payroll in the hands of a capable provider, then we can help there too. Our managed payroll service is delivered by a team of expert consultants who are CIPP accredited and experienced in the full end-to-end process. It’s about more than ‘handling your payroll’. We become your payroll department; getting under the skin of your business to understand who you are, what you do and what you need now and in the future.
All our payroll services are delivered by expert consultants and we’re the Payroll Service Provider of the year according to the CIPP, so you know you’re in safe hands.
So, whether you’re looking to build a world-class in-house payroll team, or leaning towards working with a market-leading managed payroll provider, you are already in the right place.
