Outsourcing Payroll: The Pro’s and Con’s

Outsourcing Payroll: The Pro’s and Con’s

Payroll commonly refers to a company's records of its employees' salaries and wages, bonuses, and withheld taxes. It is a specialised function that requires specialised and trained staff. For decades, it was seen as a simple accounting function but it is no longer the case. It is now a specialist occupation on its own. 

Payroll is the one financial function that cannot be delayed. There are many penalties that can be imposed for non-compliance. If you own a company and are fretting over your payroll, you need to outsource your payroll right away. Not only will outsourcing save you money and time, but it also saves you from a headache. However, whenever you make the decision of outsourcing, you need to consider all the pro’s and con’s that come with outsourcing. So, what are the pro’s and cons of outsourcing your payroll? We will shed some light on it in this guide, but before that, it is important to know the basics of payroll. So, let’s get started.

What is employer’s duty when it comes to payroll?

The business of employing people in the UK is regulated by government legislation designed to protect employees. Under these legislations, employers are entitled to provide a regular financial reward for their work. This amount is specified in their contract of employment.

The government department that is in charge of collection of taxes is Her Majesty’s Revenue and Customs (HMRC). The job of paying employees is handled by the payroll department of a company and you, as a payroll administrator will need a range of skills and knowledge to do the job rightly. You must be aware of the need to get things done on time and to do them correctly and accurately.

Employees are entitled to receive their pay on or before the due date. You must always meet the deadline. Failure to pay your staff on time could cause financial difficulties for the employee, undermine their confidence in their employer and thus demoralise them at work.

 There are also deadlines for making payments to HMRC, the courts, pension providers and other external bodies. Failure to pay these on time may result in financial penalties and high-interest charges.

Any variations or changes to payroll must be dealt with promptly. Failure to make necessary changes may even result in incorrect payments being made which is a setback for both the employee and the employer.

People working in payroll need to be in touch with HMRC regularly, both for advice on keeping up-to-date with changes in legislation and practices because there are a number of legal obligations that employers have to meet when employing and paying their staff.

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Payroll Requirements

Employer Records-Information

As a legal minimum you must record the following information for each employee:

•    Full name

•    Gender (male or female) and date of birth

•    Full address and National Insurance number

•    The date the employment started

You may also be  required to keep other information in the employee record as well, including e.g. - Employee number, home telephone or mobile number.


There will be a recognised procedure for inputting an employee’s details as well as to alter it. This will depend on the size and structure of the organisation.

 Here are some examples of changes to employee records that will require authorisation:

•    Changes to pay rates or status (e.g. through promotion)

•    Changes to hours worked

•    Change of pay frequency

•    Changes to employees’ personal details (e.g. marital status, home address, bank details)

•    Voluntary deductions to be added (e.g. pension contributions, charitable donations)

Prior to the Payroll administrator processing a payroll, the values for each employee must be checked and, wherever necessary, should be authorised by signature. In a small business, this signature can be of just one person, for example -the Payroll or Finance Manager. But in a large business, there may be departmental managers who sign to authorise payments for staff in their workspace. For instance, if the Payroll administrator is processing the pay of several warehouse employees by inputting their working hours from timesheets, the timesheets will be signed by the Warehouse Manager. In a large organisation, specimen signatures will be available to the Payroll administrator to ensure that the signed documents are genuine. A list of authorised signatories (e.g. departmental heads) requires being held and kept up-to-date in the payroll office.


 The functions of payroll can be summarised as:

• Calculating gross pay for all employees

• Calculating statutory payments (such as SSP, SMP etc)

 • Determining what payments are subjected to income tax and national insurance

• Calculating PAYE

• Calculating national insurance

• Making other deductions from pay

• Calculating net pay

• Making payments to HMRC

• Paying the employees

• Producing documents for HMRC, employees and the accounts department.

These are the minimum requirements. Payroll requires other duties to be taken into consideration as well. There must be clear lines of authority, so that Payroll Manager knows from whom to accept instructions about an employee starting, leaving, receiving a pay raise, or being entitled to receive a bonus or commission.

Calculating gross pay of an employee

Gross pay of an employee must be calculated accurately and on time. This will usually be one of the following:

• Fixed amount per week or month

• Rate per hours worked

• Piece rate, an amount per achievement, such as unit assembled.

For an hourly rate or piece rate, the Payroll Manager must know the amount achieved, such as from a timesheet, clock card or similar document. If overtime is paid, the Payroll Manager must know if this is at a normal rate or at a premium. Where bonuses and commissions are paid, there must be a system to ensure that Payroll Managers are notified of the amount. However, when the gross pay is calculated, it must comply with the law on the national minimum wage.

Advances on salary 

Usually, an advance on salary is ignored for payroll purposes.  Let’s say -an employee normally receives a monthly gross pay of £4,000 and net pay of £3,300 after tax and national insurance. The employer agrees to lend him £1,000 partway through the month. The £1,000 is paid without any deduction of tax or national insurance. At the next pay run, the payslip is calculated as if no advance had been made, and the sum then deducted from the net figure. So the payslip will show gross pay of £4,000 and net pay of £2,300.

Back pay 

Back pay is when a retrospective adjustment is made to a pay rate. An example of this is an employee given a pay raise from 1st August backdated to 1st May. Payroll must check for each employee whether that employee has been continuously employed from 1st May, and make a pro rata adjustment if not. The back pay amount must be calculated and reflected separately on the payslip. It is treated as an addition to gross pay in the pay period once paid. The Payroll Manager does not need to go back and re-calculate past payslips.

Allowances and expenses

 Most of the times, an allowance paid in cash is treated as an addition to the gross pay. It is subject to tax and national insurance. To the extent that the allowance represents a tax-deductible expense, relief can be claimed. This needs to be done by the employee where the allowance is reflected in a tax code. Otherwise, the employee may apply to HMRC for a dispensation for it to be paid without the tax deducted. Business expenses that are compensated to an employee are usually not treated as gross pay. A refund of a personal expense usually is taxable as gross pay. The amount of any allowances and expenses is a matter to be agreed between the employee and the employer. They are free to agree on almost anything they wish to. Payroll’s function is to ensure that tax and national insurance is operated accurately.

Benefits in kind 

Benefits in kind are things which are provided by an employer but are not in the form of cash. Examples include company cars, cheap loans, private medical insurance, social club facilities and something similar. Most of such benefits are subject to income tax and some are also subject to national insurance. However, the methods of collecting the taxes on these are different. Instead of deducting tax at source under the PAYE scheme, a form known as a P11D is submitted at the end of each year with a list of the benefits provided. The employee’s tax code is generally adjusted so the employee pays tax on the benefit in the following year.

Net salary

 Net salary is calculated by making deductions from gross salary. The only items that may be deducted from salary are:

 • Tax and national insurance

 • Items that the employee has authorised (such as pension contributions, loan repayments or trade union dues)

• Student loan deductions

• Attachment of earnings orders

 • Corrections from previous payslips (with exceptions)

• Shortfalls in the retail trade.

 It is an offence under Employment Rights Act 1999 s13 to make any other deduction from wages even if the employee owes you some money.

Mistakes on payslips cannot always be recovered from an employee. If an employee had no reason to believe that he or she was being overpaid and has spent the money, you may not legally be able to recuperate the overpayment.


 Every employee is entitled to receive a payslip each pay day under Employment Rights Act 1999 s8. This must state:

• Gross pay

 • Amounts of fixed deductions

 • Amounts of variable deductions

 • Net pay

• How it has been paid if more than one method is used.

Most payslips give much more information than this. However, the above is all that an employer is obligated to state.

Payment of wages

 The wages or salary of each employee must be paid in a method agreed between employer and employee. By far, the common method is by bank transfer using BACS. Over 90% of all wages are paid this way. Other on-line banking services include CHAPS and Fast Payments Service. Wages may be paid by cheque or even in cash.

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Computerised Payroll and RTI

Post-2013, almost all employers (with very few exceptions) were required by law to start running their payrolls on a computer. Many, of course, were already doing this. The reason it is mandatory is so that employers can transmit up-to-date information to HMRC online on each and every pay day about who their employees are and what they have paid their employees. Formerly, contact with HMRC was by post. The online process is called RTI or Real Time Information.

It is essential for all the organisations with employees in the UK to have a separate payroll staff. Laws dictate how tax and national insurance must be deducted, payslips issued, records kept and returns sent to the tax department. All of these requirements are mentioned under payroll.

A simple payroll may have just one employee paid the same monthly salary, a complex payroll may have many staff, paid different amounts each week, with new employees joining and existing ones leaving.

Payroll Systems

It is still possible to calculate income tax and national insurance manually and issue handwritten payslips without using a computer. Most returns must be sent to HMRC electronically now, so only the most stubborn of employers still refuse to use a computerised payroll system.

A good system will do the necessary calculations, produce payslips, send returns to HMRC and print P45, P60 and other forms for employees. The types of calculations include tax, national insurance, sick pay, maternity pay and others according to your needs.

Some payroll options cover only a subset of these functions, and you need to supplement them by manual processes. For instance, HMRC provides free software to do the calculations, but it does not produce payslips.

Fully functional payroll systems for small businesses come in two main categories:

• Payroll packages that you install on your PC

• Online systems that you access using a browser

A basic package that ties your payroll details to a single computer must be kept secured and backed up. An online system stores the data remotely, and you can access it from different locations, by entering your credentials.

Whichever option you choose, you should always consider how the figures will be transferred to your accounting system. It is easy to enter the figures manually, but this can be streamlined by choosing a payroll system that is compatible with your current accounting system. Some systems are compatible with many accounting systems and therefore you don't necessarily need to buy them from the same company.

Staying Up-to-date

Payroll rules change frequently, so you will need to ensure your system is up to date. Most software packages have to be upgraded annually, whereas an online system should be kept updated automatically.

The importance of good support is hard to overstate. In the situation where a technical problem is preventing your employees being paid, a lot of stress can be avoided if you can pick up the phone and get a quick answer. Depending on your choice of the payroll system, support may be included in the basic price or may be an optional extra.

How you decide to manage your payroll is a crucial choice, as mistakes can be costly. It is essential to find a solution that suits your business, whether it is outsourcing, a package or an online system.

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Why Is It Important To Manage Payroll?

Every employer should get to grips with payroll management. It’s a legal obligation to have a traceable payroll system recording all payments, provide HMRC with monthly (RTI – real time information) updates, and provide employees with payslips. Salaries tend to represent a large proportion of company costs, so managing payroll properly is central to managing your cash flow, which is of paramount importance to the overall running of your business.

Many businesses leave payroll management to either their accountants or to payroll agencies. These are good options for many businesses, as it is imperative to your relationship with your employees and HMRC, to keep your payroll records in order and make sure everyone is paid on time correctly. Errors can be corrected, but there are fines for late reporting, and if employees hate being paid late, they hate being told they’ve been underpaying tax, and it’s coming out of their next pay cheque, even more.

Employers’ Contributions

Employers’ National Insurance is set at 13.8 percent on earnings over £155 per week or £8,060 per year. Auto-enrolment pension contributions start at one percent of a worker’s annual salary and are scheduled to rise to three percent in 2018. What many employers forget is that while these obligations increase the monthly cost of each employee, they are a cost of running your business and eventually will result in a reduction of your corporation tax bill.

If you are handling payroll yourself, on top of these rates, you must also understand income tax rates and brackets, employees’ National Insurance, and employees’ auto-enrolment contributions, so you can deduct these from their salary each month. This can seem overwhelming, but HMRC’s online system and a large range of payroll software options are out there to take away the hassles of calculations from you.

Registering as an employer

An employer of any worker getting paid over £112 per week must register as an employer with HMRC, and must usually register online for PAYE (Pay-As-You-Earn). PAYE is HMRC’s tax withholding system, which collects income tax, employees’ National Insurance, employers’ National Insurance, auto-enrolment pension contributions, and any student loan repayments. The system helps you calculate all of these different obligations and deducts them automatically when a payment is made to an employee on each payday.

PAYE exemptions

You are exempt from PAYE if none of your workers earn over £112 per week, as long as they don’t get expenses and benefits, have any other job, or receive a pension. Registered or not, you must always keep meticulous payroll records. At the same time, registered employers must still report payments made to employees paid under the £112 per week threshold.

Pay – what counts?

Payment is made up of an employee’s regular salary, any bonuses or commission, holiday pay and any statutory payments, or for sick pay. If you’re handling payroll yourself, you still need to issue regular pay statements, known as payslips. Payslips must state gross salary, any fixed or variable deductions with a statement of details, and net pay post deductions. If you breakdown pays into separate payments, details of each payment should also be shown.

Don’t Panic

This is a lot of information, but really it’s just a handful of fixed-rate deductions you must take from your employees’ salaries and a couple of fixed-rate contributions you must make to HMRC. If you do this correctly, you’ll have all the information needed to process payslips at hand. It’s highly advisable to invest in some payroll software, and often it is more cost-effective to hand over the whole job over to your accountant or a payroll agency.

Managing Your Payroll In-House

If you decide to manage the payroll in-house, you will need to decide who is going to run it and what tools will be required. In very small companies, it is often the job for one of the directors, but larger firms delegate it to an individual, a team or a department.

Whoever is running the system needs knowledge of the workings of the PAYE tax system, and the returns that must be sent to HMRC. Currently, the tax authorities must be informed when you start as an employer, when an employee joins or leaves, and at the end of each tax year.

HMRC expects a return every time you pay your staff. These returns can be sent directly from your payroll system, but it is useful to understand what it is doing. As well as sending information to HMRC, you must send them payments of tax and national insurance. This can be done monthly or quarterly, depending on the size of your business.


One way a small business can organise its payroll is to outsource it – typically to a payroll management firm. If outsourcing is chosen, good communication is essential.

Now let's get on the topic at hand! Pro’s and cons of outsourcing your payroll! Apart from removing the regular stress and trauma that payroll compliance inevitably brings, outsourcing your payroll can be a perfect business decision too – a solution that can bring considerable benefits in costs, efficiency and loyalty to organisations. In today’s world of quick communication outsourcing, has become even easier. Here are some pros and con’s that can be weighed against each other to find out if it’s suitable for you.

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Pros & Cons of Outsourcing Payroll


Gives you peace of mind

By outsourcing your payroll to a trusted payroll provider, you and your team can get peace of mind, resulting in a better focus on work, improved productivity and staff loyalty.  When you know that your employees are being paid properly - on time, every time and that your compliance responsibilities are being taken care of, you can rest at ease.

More importantly, outsourcing gives you access to essential skills and knowledge at low cost. With over 43,000 pay-related cases a year ending up in an employment tribunal, you simply can’t afford to get wrong at payroll management.

Using a trusted, reliable and professional provider to process your payroll, here in the UK, will give you, and your staff, the reassurance and confidence that your payroll responsibilities are being properly and efficiently discharged.

Minimises your risks of fines, penalties and inspections

The financial penalties for failures to meet PAYE compliance regulations, especially under the latest RTI regulations, can not only be severe but will involve wasted management time, employee dissatisfaction and vulnerability to costly Inland Revenue PAYE Inspections.

It is difficult, especially for smaller businesses, to engage, train and retain suitably reliable, qualified or skilled staff, and inadequately trained staff can lead to expensive mistakes and penalties for non-compliance – new and part-time staff, especially, leaves you extremely vulnerable to be penalised.

Saves you substantially on software, hardware, manpower and consumables costs

Software costs - Payroll programs have an initial acquisition and installation cost. Not to forget the ‘learning curve’ and ‘time costs’ as your companies staff grapple with how the program works. Then add that to the hassle of adding the annual updates (tax codes, rates, etc) and annual software support subscriptions. The overall cost of maintaining a payroll in-house can become more expensive than you might realise. These hassles and costs can be avoided by outsourcing it to the specialists.

Staff costs - Payroll staff costs can be considerable when including their wages, cover for holidays, sickness, maternity, etc, Along with all the hassle, these issues involve. Inadequately trained staff can lead to expensive mistakes and penalties for non-compliance – new and part-time staff, especially, leaves you extremely vulnerable and this is where payroll outsourcing takes the upper hand.

Hardware costs – The cost of the computer used to process payroll and its maintenance, together with a dedicated printer can cost you four figures every three or four years. The cost of specialised security stationery, printer cartridges and postage all keep adding up over the year. Outsourcing takes the added stress of managing and maintaining the system away.

Security – Outsourcing also takes away the time and hassle of regularly backing up the payroll data along with the internal security issues relating to the handling of sensitive individual records.

Leaves you free to do what you do best – run your business

Why get involved with the ever increasing load of regulations that make payroll operation exceedingly complex and time-consuming. What if, because you were bogged down on routine issues, you miss a significant sales opportunity – an ‘opportunity cost’ you can’t measure? Outsourcing your payroll frees up your time to focus on what you are best at - on what’s important in your business and on what really adds value to your bottom line.

As a business owner, outsourcing payroll allows you to focus on the core activities of your business. Moreover, passing your payroll information to the third party helps you to know and track everything about your payroll expenses.

Saves time and is efficient

 When you outsource payroll to payroll companies, they will do the job efficiently as they are designed to do payroll operations quickly and correctly without any interruptions. One of the top advantages of outsourcing payroll is it saves time. When you outsource, your staff will be free from doing payroll related work like calculating pay and deductions and spend their time on more value generating activities.



Outsourcing your payroll increases the risk of you being connected to unreliable firms. And, such firms may not be able to deal with the unique aspects of your company’s payroll and can produce errors in your payroll. There is also the quality of work which you may not be satisfied with when you have unreliable firms handling your payroll functions. But if you choose a reputed firm such as www.payroll.co.uk this won’t be a problem for you.

The risk to confidential data

  • Handing your payroll operations to the payroll companies can cause your financial records to be exposed and thus leaves your company vulnerable to lawsuits. This is why you need to choose a trusted firm and insert a clause in a contract if anything occurs to protect your confidential information. At payroll.co.uk we take data security as seriously as you do.
    • We have in place the latest technology in terms of firewalls, anti-virus software and password protection. Also, updates are performed regularly to make sure we always have the latest security updates.
    • Our servers are hosted in a secure location where only a few people have access to. This ensures not everybody can access the data. We limit every single employee to data access depending on their job and all our computers are password protected to make sure no one else can access key data.
  • HMRC compliant – We use fully HMRC approved software.


It is apparent after weighing the pros against the cons that outsourcing your payroll to a third party is nothing but real profit to your business if you choose a trusted and reliable payroll provider. Moreover, payroll rules and legislation are ever changing and it requires the Payroll Manager to be updated.  Also it can be complex for in-house staff to handle it rightly making you business prone to payroll errors inviting heavy penalties by HMRC. So, it is in your best interest that you choose to outsource your payroll to a trusted payroll firm so that you can have a peace of mind knowing that the payroll system is being handled accurately and is in compliance with HMRC.  This way you can focus on the greater aspects of your business and ensure that your business grows and grows.


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