In-house payroll vs outsourcing: the pros and cons

What is in-house payroll?

In-house payroll is the internal management of payroll processing by an organisation. There will usually be a dedicated payroll employee or department, under the “HR” or “finance” umbrella. For payroll processes to be classed as in house, the people managing them will be employees who are on the payroll themselves.

In-house payroll management usually involves the use of payroll software to facilitate the necessary processes and store data securely. The software can help to automate processes and ensure accuracy in this vital area. Some of the key processes involved in payroll management include:

• Bank account management
• Recordkeeping and data management
• Payroll scheduling
• Time tracking and collating details of hours worked per employee
• Calculating and making deductions, including:
     - Tax
    -  Pensions
    -  Student loans
     - Benefits
     - Healthcare contributions
• Initiating payments

Benefits of in-house payroll

Integrated data. Managing processes in-house means you can integrate data from across HR functions including payroll, leave and absences, time management, accounting, recruitment and compensation.

Benefits of integration include:
- Increased visibility across your HR function, with all data available in one place.
- Improved analytics thanks to accessible, integrated data.
- Better decision-making opportunities based on data and facts.
- Time-saving opportunities from pooling data across functions.
- Reduced risk – with fully integrated data, compliance becomes simpler.
- Trustworthiness, with one source of truth that can be referred to by everyone.
- Consistency in data processing and management.

Control. Your payroll is your responsibility meaning you can manage it in the way that makes sense for your organisation. If last-minute changes are required, you have more flexibility to make them without having to notify external agencies.

Automation. Processing your payroll in-house means you’re in charge, giving you the option to automate processes and save time. This can often be done by your HR system, which can automate payroll processes such as deductions, filing and more.

Simple self-service features. You can issue online payslips and documentation using internal self-service software, which is readily available as part of your HR system. With 47% of HR leaders prioritising employee experience, there is likely to be increasing emphasis on features that can streamline processes and make people’s everyday lives easier.

Planning capabilities. Keeping your data in house gives you extensive analytical opportunities to forecast and plan ahead around compensation, benefits, business growth and more. In the fast-changing world of HR, planning ahead is key – 53% of HR leaders are focusing on organisational design and change management, while 42% are prioritising the future of work. Access to quality data will be key, including payroll.

Drawbacks of in-house payroll

Room for error. UK businesses could be losing as much as £150,000 a year through payroll errors. However, much of the risk could be mitigated by using HR software that allows for automation – 72% of companies are still estimated to be using manual processes.

Compliance management. When you manage payroll in house, compliance around holiday pay, national minimum wage, taxation and much more becomes your responsibility. Compliance is becoming ever-more complicated and major organisations like KPMG do not expect this to let up, anticipating the trend of increasingly complex workforce compliance to continue.

Time-consuming processes. Payroll is complex and the processes involved take time – even with effective automation, systems and processes still need to be properly managed. This can significantly impact the ways that teams spend their time, reducing their ability to take on other important tasks.

Cost. Time is money, particularly in cost centres such as HR and finance departments. Could your team be spending their time on valuable endeavours if you were to outsource payroll instead? If you need to hire new team members to take on payroll, there are also recruitment, onboarding and time to productivity costs to factor in.

Resourcing. Payroll is a specialised function that needs to be managed by trained, skilled employees. Having the necessary resources in house can be expensive and gaps can be left when people leave the team, take annual leave or are off sick.

What is outsourced payroll?

Payroll outsourcing is the process of transferring payroll tasks and responsibilities to an external agency. This may be an individual person, or a specialist payroll provider – when payroll is managed outside of the company, it is considered to be outsourced.

The advantages and disadvantages of outsourcing payroll will largely depend on the size of your organisation and how it operates. If you have the capacity and resources to manage payroll in house, outsourcing may not be required. However, payroll outsourcing vs managing it in house is a choice that can save considerable time and precious budget.

Benefits of outsourcing payroll

Saves time. The time saving element is the most tangible benefit. When you consider all the ways you could save time – hiring, training, managing time off, on top of completing all associated payroll tasks – it could be significant.  

Quick to set up. While selecting and instructing a payroll provider might not be instantaneous, it is likely to be quicker than hiring in-house experts or training up existing employees. If time is of the essence, outsourcing payroll could be a good option. And if you find that you’re not happy with the service, it should be relatively quick to switch payroll providers as well. 

Reliable. You won’t need to worry about staff absences, resources and time management – your payroll provider will be contracted to pay your people and complete all associated processes on time. If there are peak times for your business, payroll can be taken care of without putting pressure on internal resources.  

Compliance is managed.  for you. Your payroll will be taken care of and compliance will be built in, without you having to worry about it.  

Tailored. You do not have to outsource all aspects of your payroll – you can pick and choose processes depending on what makes most sense for you. An experienced payroll provider can work with you to design a service that suits your business, giving you all the support you need. If you do choose a fully managed payroll service, you can set the schedule that suits you and ensure all other provisions are accounted for by your provider. 

Flexible overheads. Outsourcing payroll will of course come with an associated cost, but this is more flexible than in-house employee overheads, and it can be excellent value. Industry experts agree: “Outsourcing can give you access to capabilities and facilities otherwise not accessible or affordable to the company. What’s more, it can bring in fresh perspectives as new people bring new ideas on how to do certain things” – Jackline Ogara MCIPPdip, payroll manager at River Island. 

Drawbacks of outsourcing payroll

Costs. Over time, the ongoing costs of outsourcing payroll can mount and it can become a significant business expenditure. However, mistakes cost more – even employee morale. It’s been shown that late or incorrect payments can cause employees to become actively disengaged, so investing in a reliable payroll service is crucial.  

LA lack of visibility. Outsourcing payroll can lead to a lack of oversight in key business areas due to decentralised data. Considering leader and manager effectiveness is the top priority for HR leaders, quality, well-rounded data is needed. Without it, managers and leaders can’t make effective decisions; they need to see the bigger picture and have organisational oversight. If you decide to outsource payroll, ensure you will still have access to the necessary data.  

Less oversight of vital processes. When you outsource payroll, you put the trust in your provider to manage it correctly. "You cannot check in when you want to or add anything that is missing. Also, the contract might be too rigid to accommodate change.” – Jackline Ogara. 

Outsourcing large amounts of data. Payroll data is some of the most sensitive information your business will hold. Vet your provider thoroughly and ensure that data sharing processes are secure and well thought out, reducing the risk of sensitive data being put at risk. 

In-house payroll vs outsourcing – which should you choose?

“Should I outsource payroll?” It’s an important question and one without a clear-cut answer – payroll peace of mind will look different to every business. To think through the pros and cons of in-house payroll vs outsourcing, follow these steps: 

• Audit your processes. What tools do you use for payroll processing? Are there better ways of working that would save time for your teams? Take an honest, objective look at your processes and complete a thorough audit to understand where improvements could be made. You may want to consider outsourcing parts of your payroll process and keeping others in house. 
• Consider providers. Research and contact outsourced payroll providers to see what they can do for you. You could hire a consultant or small-scale provider, or you could choose a payroll bureau that specialises in outsourced payroll services for businesses. 
• Assess your payroll software. Could you improve payroll provision with integrated HR or payroll software? If you’re still using spreadsheets or manual processes, software will revolutionise your payroll.  
• Look into costs. Consider what your budget would be – how much could you realistically allocate to outsourcing payroll? When speaking with potential providers, you will be able to get a more in-depth understanding of the different options available and what they would cost.