In-House Payroll Vs Outsourcing: Which is A Better Choice?

Without a shadow of a doubt, managing payroll is one of the most vital aspects of any business to ensure employees are paid accurately and on time while also complying with tax and legal requirements. However, doing so is not a breeze. On the contrary, there are many stumbling blocks and complications along the way that an organisation faces to successfully complete every pay cycle. In this respect, employers are often divided when it comes to facing a key decision: should they handle payroll in-house or outsource it to a professional payroll service provider? While each option carries its own advantages and disadvantages, evaluating the ups and downs of each is essential for businesses to assess their needs before reaching a rational decision. Accordingly, this blog compares the most prevalent differences between two payroll processing options, in-house payroll vs outsourcing, highlighting key considerations to help you determine which option best suits your business.

 

 

What is In-House Payroll?

Before we dissect in-house payroll vs outsourcing, let’s understand each separately. In-house payroll refers to managing payroll functions internally within a business or organisation. Primarily, there is a dedicated payroll department or HR team that typically oversees the process to ensure employees are paid correctly, tax obligations are fulfilled, and compliance with HMRC regulations is maintained. Notably, the payroll process is considered in-house when the people managing it are employees who are on the payroll themselves.

Furthermore, the companies that go for in-house payroll usually place their reliance on payroll software or manual record-keeping for conducting fundamental payroll processes, such as scheduling payroll, managing data, assembling the details of hours worked per employee, calculating wages, and deductions(tax, pension, benefits in kind, student loans).

Understanding The Functioning Of an In-House Payroll System:

The in-house payroll process of an organisation is a joint or collective effort among the payroll processing team, employees, and the tools that are used for accomplishing the task. Let’s discuss the major steps involved in in-house payroll processing:

• To begin with, the company creates a payroll bank account, from which funds will be withdrawn when employees cash their checks or get direct deposits.
• Next, the company will set up a time tracking system, i.e., a system for tracking the working hours of team members. It is essential in determining how much to pay them if they are working as hourly employees. However, salaried employees will receive a standard rate for each paycheck.
• Thereafter, a payroll schedule is established. For instance, the most frequently used pay period is every two weeks.
• Based on how much each employee has worked in a given pay cycle, the timekeeping data is collected to calculate their gross pay.
• Then all the necessary deductions are made from each employee’s gross pay to get their net or actual pay. The necessary deductions include tax withholdings(income tax and NICs), pension contributions, benefits-in-kind, student loans, and healthcare contributions.
• Eventually, after the leftover amount is calculated, the company makes the payment on its predetermined or scheduled payday.

If you want to dig deeper into the concepts of payroll, gross pay, and net pay, our following guides have elaborated on each at great length:

• What is payroll?
• What is the difference between gross pay and net pay?
• How to calculate gross pay and net pay?

What Does It Mean To Outsource The Payroll?

In simplest terms, when a company’s payroll is processed outside of it, it is referred to as outsourced payroll. Payroll outsourcing is the process of transferring your payroll management to an externally hired third-party company or service provider. When a company opts to outsource its payroll, it hires an external outsourcing agency (which can be an individual contractor or an expert payroll provider) to execute its key payroll-related tasks. Noteworthily, the solutions these providers offer typically range from a basic service to full payroll service delivery, such as undertaking tasks of tax filings, corresponding with HMRC, and maintaining compliance with payroll and employment laws.

Many businesses go for outsourced payroll by delegating their payroll responsibilities to professional accountants or payroll specialists to ensure that accuracy and efficiency are not compromised. It might be pertinent to mention that a proficient outsourced payroll service gives you the semblance that the outsourcer is your own payroll team while also saving time and reducing your costs. Fortunately, you can usually personalise the level of outsourced payroll support that the supplier provides you with.

How Does Payroll Outsourcing Work?

While the process of payroll outsourcing varies by every payroll provider, the majority of them frequently follow the following common steps:

• You will first register or sign up with the payroll service provider of your choice.
• Follow the setup instructions and contact assistance if needed.
• Helpfully, your payroll provider will process payroll automatically using timesheets, employee data, payroll taxes, and other relevant deductions.
• For smooth execution, you can designate an internal team member to authorise paychecks.
• Lastly, you will authorise/approve the final payroll processing.

Weighing The Pros And Cons Of In-House Payroll Vs Outsourcing

After comprehending the key concept of in-house payroll vs outsourcing, we will now outline the prime differences between the two. The following crucial factors elaborate on how the options are divergent from each other while enabling you to decide which side you should tilt towards:

Time Efficiency:

The first factor to compare in-house payroll & outsourcing is the time-saving feature. Admittedly, saving as much time as you can is a prime benefit you can get to considerably bolster your business productivity. For instance, take into account all the ways you could save time when hiring and training while also carrying out all the payroll tasks. Now, managing your payroll in-house can undeniably be time-consuming, particularly when you have scads of employees, since you will be handling your payroll manually. Thus, in-house payroll processing requires significant time and effort, which can divert your attention away from core or higher-value business activities.

On the contrary, by outsourcing payroll,  businesses can focus on core operations and growth while payroll professionals handle administrative tasks. Outsourcing payroll can save you a lot of time since now the externally hired team will manage the entire process, while you can concentrate on higher-value tasks.

Cost-Effectiveness:

The cost your business incurs in payroll processing is another crucial factor when considering in-house payroll vs outsourcing. Time is money, particularly in cost-intensive departments like HR and finance. Based on the size and structure of your business, hiring someone internally can be more cost-effective with in-house payroll. In-house payroll is economical for small teams but requires software and training. For instance, for small businesses where the company has a small workforce, managing payroll in-house can be cost-efficient since it saves them from bearing outsourcing fees. However, it must be emphasised here that, small or not, the business will still incur software and training costs because payroll software requires regular updates, and employees need ongoing training to stay compliant with changing or evolving regulations.

Conversely, for small businesses, cost savings with outsourced payroll come more easily than in-house solutions, despite it coming with a service fee. However, outsourcing payroll has become highly expensive for large companies. To illustrate, since most third-party payroll providers usually charge on a per-check or per-employee basis, it becomes undesirably costly for larger companies with thousands of employees.

Resourcing:

Payroll is an intricate function that mandates qualified and trained employees to manage it. With in-house payroll, having the necessary resources can become pricey, and loopholes might surface when team members quit, take annual leave or are indisposed. On the flip side, outsourcing your payroll eliminates the need to worry about staff absences, recruiting, training, and retraining staff using resources and time management, since your payroll provider will be obligated to pay your employees and deliver your payroll on time.

Additionally, if your business experiences peak times, the payroll provider will take care of it without you putting additional pressure on internal resources.

Control And Customisation:

Managing payroll internally gives businesses full control over payroll processes and enables them to customise operations and make immediate adjustments or alterations when necessary. Since your payroll is your responsibility, you can conveniently manage it the way you deem fit for your company. Even if you need to bring about last-minute changes, you have more flexibility to make them without having to inform the external parties.

Contrarily, outsourced payroll leaves businesses with less control over payroll decisions and timing since the payroll tasks are now fully delegated to a third party.

Confidentiality And Data Security:

Data privacy and confidentiality is uncompromising: no business wants to run the risk of exposing its data to any external agent. It is where in-house payroll holds an upper hand over outsourced payroll. With in-house payroll, sensitive employee data remains within the company, which ensures confidentiality and eliminates the risk of third-party breaches. Therefore, you do not run the risk of having your employee data being compromised or shared, as the fewer individuals or systems your data passes through, the lower the security risk.

Compared to that, outsourcing payroll means your data will be shared with a third party, which unarguably raises potential privacy and security threats. Let’s critically analyse it. To process payroll, both in-house staff and outsourced payroll providers necessarily require access to the most sensitive information your company holds, like employee bank account details, schedules, etc. Ultimately, sharing these details with a third-party agency can drastically increase your risk of a security intrusion.

However, to curb the privacy breach possibilities, you must evaluate and investigate your provider thoroughly to ascertain that data-sharing processes are secure and not subject to risk. Moreover, it is discreet to fully comprehend and review the security policies and ensure the providers you outsource your payroll to are credible.

Overall, if you are considering in-house payroll vs outsourcing in the context of data privacy, in-house payroll takes the lead.

Dependence:

Since Internal payroll teams have a better understanding of their employees’ specific payroll needs and company policies, in-house payroll is a better choice where businesses are averse to depending on an external source and ensuring employee satisfaction. On the other hand, by outsourcing payroll, businesses depend on the payroll provider’s efficiency, which can affect employee satisfaction if any delays or errors occur from the provider.

Accuracy And Risk Of Errors:

Accuracy is a substantial aspect of payroll processing, and it cannot be overlooked when comparing which is a better choice: in-house payroll vs outsourcing. One of the prime snags of in-house payroll is that it has ample room for errors since most of the tasks are conducted manually, such as incorrect tax calculations or late payment submissions, which can result in penalties from HMRC. It has been observed that businesses could lose as much as £150,000 annually owing to payroll mistakes

On the other hand, outsourced payroll automates and streamlines your business rather than subjecting it to human or manual errors. Professional payroll services use advanced software to minimise the errors occurring in tax calculations, deductions, and employee payments. Consequently, with the technical knowledge, expertise and HMRC-compliant software in place to streamline everything, the risk of errors and the resultant penalties with outsourced payroll is extensively reduced.

Compliance:

Unarguably, in-house payroll teams handle a lot of sensitive information and employee data, such as bank accounts, birthdates, and Social Security details. As a result, if you choose to process your payroll in-house, ensuring compliance and accuracy are paramount. Now, if you onboard an individual who is inexperienced with or is learning compliance rules, it can cause non-compliance issues and problems for your finances and employee relations.

In contrast, outsourced payroll systems typically use standard processes that ensure strict adherence to HMRC’s compliance regulations. Subsequently, payroll providers stay updated and well-informed with the latest tax laws and employment regulations, reducing the risk of non-compliance. All in all, by closely following the requirements they are subject to, expert payroll providers ensure greater compliance to prevent your business from compliance hassles.

 

 

Conclusion:

Considering which of the two is a better option, in-house payroll vs outsourcing, is a decision that can only be reached after deliberation and analysis of the merits and demerits of both. Nevertheless, the best choice depends on the specific needs, preferences, and your business goals. While in-house payroll offers control and confidentiality, outsourcing provides accuracy, efficiency, and compliance with HMRC regulations. Hence, employers necessarily weigh these factors carefully to choose the most suitable payroll management option.

In addition, for businesses looking to streamline payroll processing while also not letting go of accuracy and compliance, outsourcing your payroll management to a trusted provider can be a watershed choice. In this connection, the well-versed and certified payroll accountants at Payroll Services Accountants can be your stress buster in the context of managing your payroll efficiently, reducing administrative burdens, and ensuring your business fulfils its tax obligations seamlessly. Whether you are just a step away from outsourcing or need guidance on improving your in-house payroll operations, our accountants offer all-encompassing services to help you make informed payroll decisions harmonising with your business needs.

Disclaimer: Please note that the information provided in this blog is exclusively for informational purposes and should not be considered financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.