Payroll: In-house Vs Outsourcing

Highlighting the key differences between in-house and outsourced payroll

First published on Monday, Jul 01, 2024

Last updated on Monday, Jul 01, 2024

Whether you’re a business owner or a SME employer you’ll appreciate the importance of paying your staff on time and with 100% accuracy. But is it best to keep the payroll function in-house or outsource?

Unfortunately, there’s no clear-cut answer. It depends on factors like the size of your business, availability of resources, and amount of control that you want to have. Still, you can count on BrightHR for a clear explanation of the pros and cons.

But before we move on to look at the benefits and drawbacks, it’s worth recapping the processes of in-house payroll management and outsourcing payroll services.

Companies that opt to keep payroll in-house may have a qualified individual or an entire department responsible for finance management. Each employee will be set up on the payroll, which may be managed using payroll software. From bank account management to payroll scheduling and payment, the entire process will be looked after internally.

As you may be aware, outsourcing involves passing all of the payroll tasks and responsibilities to a third-party agency. This might either be a single finance specialist or a company offering complete payroll solutions. It’s common for the payroll to be processed using timesheets, employee data, payroll taxes and other payment information in such instances.

Business professionals in office meeting discussing payroll inhouse or outsourcing.

Benefits of In-House Payroll

Control over the process

As mentioned, there’s not a one-fits-all payroll solution. However, you might be best opting for in-house payroll management if control is a priority. This will mean that you’re able to manage the complete payroll service in a way that makes sense for your company.

Having an internal payroll system will allow you to control:

  • Levels of access to sensitive employee data (such as salaries, benefits, and bonuses)

  • Payroll scheduling, with the ability to run off-cycle or emergency payrolls as needed

  • Integration with other internal systems, such as those used for HR and timekeeping

  • Investment in payroll software and technology that best meets your business needs

  • Employee payments and payslip printing

  • Communication with HMRC

Customisation to fit your company’s needs

With complete control over payroll management, you’ll be able to customise the process in any way you see fit. This might mean bringing in a payroll clerk, who can help in the shaping of a payroll system based on set rules and practices.

In-house payroll management will also allow for flexibility in dealing with changes of company policies, tax laws, and other relevant regulations.

Time & cost savings

With ultimate control, you’ll be able to save time through the integration of automated payroll run systems. As an example, your HR system may have capacity for the processing of deductions, filing, and other payroll processes.

Plus, you might find it more affordable to keep payroll in-house. Significant savings could be made through the employment of an internal clerk, as opposed to paying third-party payroll providers to run thousands of checks each month.

Challenges of In-House Payroll

Resource demands

There are plenty of valid and hard-to-ignore reasons for opting against in-house payroll management. For instance, such internal management can put a big strain on your resources.

Even with the support of automated payroll systems, there’s still a need for proper management. This can mean that staff members have to focus on running payroll, when their expertise might be better used elsewhere.

Of course, there’s the option of bringing in specialist payroll managers. However, this will mean that you have to cover the potentially high costs of onboarding and salaries. There’s also the prospect of having to arrange cover for annual leave and time off through sickness.

Other costs of internal payroll management include:

  • Staff training

  • Integration of payroll software

  • Updates and maintenance of payroll systems

  • Arrangement of cybersecurity for staff data protection

  • Supplies needed for payroll processing.

Vital knowledge and expertise

From the performance of payroll calculations to payment scheduling, the role of the payroll manager is highly demanding. It can all prove too much for a single employee; particularly if they lack payroll experience.

And any mistakes could mean that your business is among those losing as much as £150,000 per year. There must be capacity for scaling the internal payroll function in line with seasonal changes, business expansions, and changes in workforce size.

Managed payroll service employee on the phone helping businesses manage their payroll

Benefits of Outsourcing Payroll

Cost and time effectiveness

The outsourcing of payroll may well prove a time and cost effective alternative for your business. Requiring a minimal upfront investment, it will mean that you don’t face the challenges of recruiting, training, or managing payroll tasks. The time and money savings could be used to drive your business forwards.

It’s far easier to transfer your business information to a third-party payroll provider than to set up internal systems. And you don’t have to worry about staff absences when your payroll functions are effectively managed by external experts.

Even if you find that your chosen payroll provider doesn’t quite live up to expectations, it should be possible to switch with ease.

Access to specialised expertise

As mentioned, you’ll have to take great care if you’re to pass payroll responsibilities to an in-house staff member. They’ll need to be trained and given access to the latest resources for the monitoring of payroll regulations.

Alternatively, you could count on the capabilities and facilities of a specialist payroll service provider. This may also allow for the sharing of fresh insights and perspectives on how to improve payroll management. You can pick and choose the aspects of payroll management that you’d like to outsource based on your business needs.

Reduced risk of compliance issues

Payroll processing errors could put your business in breach of the law and result in heavy financial penalties. But it needn’t be this way, as third-party payroll services are typically set up in line with relevant regulations.

You’ll likely be able to call on guarantees to cover the cost of any mistakes. And there won’t be the risk of internal fraud.

Challenges of Outsourcing Payroll

Outsourcing expense

While payroll outsourcing may result in a range of savings, it’s worth doing the sums and ensuring that it makes best sense for your company. With the per-check and per-employee charges quickly adding up, you might be better off with a well-trained internal payroll specialist.

However, this is likely to be the case for large businesses with thousands of staff members. So do your research and consider the scalability of your preferred payroll provider in line with your business needs.

Lack of direct control

Of course, there’s a significant element of trust when it comes to outsourcing payroll. It’s essential that you do your research, given that you’ll be handing the management of sensitive staff data to your chosen provider.

It probably won’t be possible to check in or make edits as and when you like. Provider stability will also be key, given the disruption that might result from their going out of business.

Potential for miscommunication

While you may rely on the full support of a payroll provider, it will still be your responsibility to ensure accuracy in the sharing of data. After all, any errors could delay the processing of payments and lead to legal penalties. That said, you must set up clear lines of communication and service level agreements specific to performance and the handling of payroll issues.

How BrightHR can help

Hopefully, this article will have gone some way to clearing up any confusion and helping you to decide whether to keep your payroll in- house or outsource. You can be confident of making the right choice provided that you consider your business needs and do your research. 

Think about the tools that you use for payroll processing and whether there’s scope for improvement. Consider the benefits that could be realised through the integration of HR and payroll software.

If you feel that the demands of internal payroll management are going to place your company under too much stress then outsourcing might well be the best bet. 
And that’s where BrightHR’s outsourced payroll solution comes in. From on-time reconciliation to the management of HMRC compliance, we can free you from the payroll burden. Go ahead and register your interest for exclusive pre-launch updates and special offers!

Janine Lennon

Head of Payroll Services

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