Why You Shouldn’t Outsource Payroll (And What to Do Instead)

Running payroll can be tedious, time consuming and stressful...

Which is why so many businesses choose to outsource their payroll.

But whilst this may sound like a quick and easy fix, most businesses who use outsourced payroll services find that managing the outsourcers becomes a full-time job in itself.

Looking for a stress-free payroll experience that will scale alongside your business?

If you're using an outsourced provider right now or considering using one - we'd urge to to stop what you're doing and browse our guide to payroll outsourcing below 👇

‍

What is payroll outsourcing? A quick overview

Put simply, payroll outsourcing is the general practice of delegating payroll-related tasks to an external provider.

Rather than managing things like checking tax calculations and sending payslips in-house, your payroll service provider will be responsible for these tasks.

When it comes to outsourcing payroll, you have two options...

‍

Outsourcing to a bureau or accountant 

Outsourcing to bureaus/accountants means handing over tasks to a third-party provider - the overwhelming majority of these tasks will be managed by humans.

If you're outsourcing to an accountant, they may even work physically alongside you in your office.

‍

Outsourcing through managed services 

A managed payroll service is very similar to outsourcing to bureaus/accountants... the only real difference being you'll have a basic dashboard to upload files to (a bit like a Google Drive).

Behind the scenes, tasks will still be dealt with by humans.

‍

Here are some of the key tasks an outsourced payroll provider will manage

Employee salary calculations: An outsourcing provider calculates salary payments, wages, bonuses, and deductions for each of your employees.

Payroll processing: Outsourcers will manage the actual payroll process entering variable data and other changes into the payroll system each pay period so that your employees get paid the correct salary on time.

Tax deductions and reporting: Tax-related tasks including deductions, reporting to HMRC, and issuing any necessary documents will all be handled by an outsourced payroll provider.

Compliance: Outsourcing firms will take on the responsibility of staying up-to-date with changing payroll legislation.

Payslips: Your employees will receive their payslips with their salary breakdown and deductions from an outsourcing provider.

Employee records: An outsourcing provider will maintain accurate records of employee salaries, taxes, and other payroll-related data.

‍

Is outsourcing payroll a good idea? There might be some use cases

SPOILER ALERT: Here at Pento, we believe that traditional outsourced payroll is outdated and broken. However, there may be some genuine use cases for your standard bureau or managed payroll service...

If you're a small business (i.e. less than 40 employees) with limited resources, outsourcing your payroll may help bring you peace of mind and cut down on some of the more complicated tasks.

Outsourcing will mean that you don't need an in-house payroll function or any payroll experience/expertise... but there's a catch.

If you're planning on scaling your business, you might want to look at alternative payroll solutions. The more people you have joining/leaving each payroll cycle, the more back and forth emails, manual legwork and risk of errors there'll be.

For some large organisations, they may feel that they need the 'safety net' of having a third-party double check their payroll - although a payroll software solution like Pento will give you all support you need from qualified payroll experts, without compromising on control or flexibility.

Reasons to avoid payroll outsourcing 

You'll still be required to do manual work

Outsourcing your payroll will undoubtedly alleviate a fair amount of administrative time.

But that doesn't mean you can just hand off all responsibility to your payroll provider - you'll still need to do your fair share of admin.

When you outsource payroll, you’ll be acting as the intermediary between your provider and your employees...

You'll still need to stay on top of the following manual tasks:

• Data collection: You'll be required to provide accurate and up-to-date employee data - like personal details, salary details, tax codes and any changes to employment status.
• Tracking joiners/leavers: When new employees join the company or others leave, you'll need to communicate these changes to your payroll outsourcing provider so that they can be added/removed from your payroll.
• Verify data: Before each payroll run, you should be reviewing your data before sending it over to your outsourcing provider. This may involve cross-checking records and making any necessary corrections.
• Review payroll reports: you'll need to check payroll reports generated by your provider to ensure compliance and accuracy.
• Handling exceptions: Some situations may require manual intervention, such as processing bonuses, commissions, overtime pay, or any other irregular payments that fall outside of your standard payroll process.
• Communicating with your payroll provider: Regular communication is essential to relay any changes, updates, or specific requirements related to payroll processing.
• Managing deductions and benefits: If you offer additional benefits, deductions, or other payroll-related adjustments, you'll need to communicate these to your outsourcing provider.

Make no mistake - if you do decide to outsource payroll, you will gain back some valuable time...

Just not as much as you might expect.

For example: Fintech platform Kriya's People and Finance team spent 50 hours per month running payroll using an outsourcer.

Even though outsourced payroll services will take on most of the responsibility for payroll, you still need to regularly get data across to them and double-check entries.

‍

You'll lose visibility and control

Whilst payroll errors may be less likely when outsourcing to a bureau or managed payroll service... mistakes can (and often do) still happen.

And one of the cons of payroll outsourcing is that they'll actually be harder to fix. 

Why? Because you'll have significantly less visibility and control over your payroll process - outsourcing essentially turns payroll into a black box. 

Finance and HR teams using an outsourced payroll solution tend to end up working to strict deadlines imposed by their provider, with reduced ability to oversee and fix errors as they crop up.

This rigidity means that all data needs to be submitted several days before payday - often around the 11th or 14th of each month - so you'll be unable to make any last minute changes or correct errors.

‍

There'll always be a degree of security risk

Outsourcing involves sharing sensitive employee information with a third-party provider. Any time you share confidential data with a third-party, there is always going to be some level of risk.

If your provider experiences a data breach or mishandles the data, this could lead to legal and reputational consequences for your business.

Although any established payroll provider will have measures in place to protect your data, they can't guarantee they won’t be breached.

If you are going to use payroll outsourcing services, make sure you take time to assess their data security protocols first.

It's worth noting that even with stringent security measures, human errors can still occur.

A simple mistake by someone at your payroll bureau/accountancy firm, like accidentally sending sensitive information to the wrong recipient, can lead to security breaches.

‍

You will have less flexibility

When you outsource payroll, you'll need to adhere to your provider's schedule.

This means you'll have to submit all final data several days before payday so any changes will need to be made far in advance.

Outsourced payroll providers will often offer a standardised solution to all their clients. This means that they're unlikely to be flexible when it comes to accommodating unique payroll requirements specific to your business.

If you have fairly complex payroll requirements like commissions, bonuses, or international payroll, an outsourced provider may well struggle to avoid inaccuracies and delays.

*This is why we recommend alternative payroll management solutions to any larger or scaling businesses expecting more joiners/leavers each pay cycle.

If you've invested in building a HR tech stack (maybe you just migrated to a new HRIS, accounting software or bought specialised tools for things like expenses and benchmarking), you’ll probably need a solution that can integrate with these sources of truth...

And if your outsourced provider can't do this, you're not getting full ROI on your tech stack.

Integrating the outsourced payroll data with other HR or financial systems can be challenging, especially if your outsourcing provider uses different software or formats.

This lack of seamless integration can hinder the flow of information and create additional work uploading/downloading spreadsheet downloads and sending emails. 

‍

Be prepared for communication challenges

When dealing with an outsourced provider, there's a strong chance you'll run into communication problems.

At Pento, we've spoken to thousands of HR and Finance Teams who contend with continuous back and forth emails with their payroll provider just to solve simple issues - you'll likely be exchanging earnings spreadsheets on a regular basis and adjusting other details in long, drawn out email chains.

Here are some of the communication issues that businesses outsourcing their payroll tend to face:

• Time zone differences
• Limited availability
• Lack of transparency 
• Poor response times
• Miscommunication that leads to discrepancies in payroll calculations.
• Needing to communicate changes in payroll policies

‍

If you offer better-than-statutory benefits, outsourcing payroll can get complicated 

The more sophisticated your benefits are, the more data inputs will be needed to run your payroll. 

This data will likely be across multiple sources - and since your outsourcer won't have access to all of these sources, you'll have to put in extra work to collate and share this data.

You've then got to explain exactly how to apply these benefits to your employees - coordinating different benefit rules, eligibility criteria, and contribution rates.. any of which may lead to discrepancies and inaccuracies in payroll processing.

Once you reach this point in benefit maturity, you're more than likely going to be doing more manual admin work than your outsourcer! 

‍

You'll lose in-house payroll expertise

Outsourcing payroll to an external provider when you don't have payroll experience within your team is completely understandable...

But if your business is growing, it may be worth bringing payroll back in-house. 

Growing your headcount tends to result in more complexities, unique payroll requirements/ internal processes as well as specific employee situations that may be slightly beyond the scope of what an outsourcer can reliably provide.

Using a payroll solution like Pento, for example, will give you access to real-time information, whereas an outsourcer may need time to process and report on data.

And since you'll be the middleman between your provider and your employees, you won’t be able to directly address any payroll-related questions or concerns from your team.

Alternatives to outsourcing payroll

Outsourcing payroll has traditionally been the default option...

In 2022, 61% of UK businesses said they were outsourcing their payroll to an external company.

However, this is mostly due to the fact that until recent years, there just hasn't been many viable alternatives.

Here at Pento, we're not building another payroll company.

We're transforming how payroll works so you get maximum control and visibility, while minimising any payroll mistakes.

Pento is an automated solution that provides expert support - purpose-built to make payroll as quick, painless and scalable as possible so you'll never need an in-house payroll team.

Why use Pento over outsourced payroll services?

• User experience: Our user-friendly interface that takes the hassle out of payroll management
• Flexibility: You get real-time data access so team members can adjust pay on the fly, adding bonuses, extra compensation, or commission structures as needed. You can also track results in real-time, meaning errors get caught and actioned.
• Scalability: Pento grows with you, not against you.
• Compliance: We'll help you stay on top of the latest payroll compliance legislation so you never have to worry about errors again.
• Automation: Pento will integrate with whatever systems you're currently using and automate laborious manual tasks.
• Access to experts: Get immediate human support from a CIPP accredited payroll specialist whenever you need it.

Here's what you expect when you move from an outsourced to provider to a solution like Pento: 

‍

Case study: How Pleo switched from an outsourced bureau to automated payroll with Pento

Pleo have been rapidly scaling in the UK since their launch in 2017.

And with a growing team came growing stress and manual admin with each pay cycle.

‍

🤔 The Challenge 

As Pleo's team scaled, so did the hassle of using an outsourced payroll provider.

• Excessive back and forth communication: Pleo was exchanging earnings spreadsheets on a regular basis and adjusting other details in time-consuming email communication with the external payroll agency.
• Long payroll lockdown periods: Because a 3rd party was doing payroll calculations, they needed all final data submitted several days before payday. This often resulted in critical changes not being made in time.
• A lot of manual work: Even though the promise of an external payroll agency sounded good, there was still a lot of manual work on the shoulders of Pleo’s Finance Team.

‍

🔑 Key Results 

Since switching to Pento, Pleo's Finance team now has more time to spend on higher-level tasks and no longer worries about the small payroll details. 

• No more waiting steps in the payroll process: Because Pento is a fully automated software solution, everything Pleo’s finance team does is instant. No more waiting for calculations or changes in earnings from an external payroll agency.‍
• Much less stressful and time-consuming process: there are no more fragile spreadsheets and email back and forths. With Pento, Pleo’s team is in full control of what gets paid out and, once approved, Pento executes payments and sends payslips to employees automatically.‍
• Complete payroll transparency: Pleo can see how changes in earnings affect calculations in real-time. Payroll is not a “black box” anymore - Pleo now has a complete overview of what constitutes their UK payroll. ‍
• Happier employees: Pleo’s finance team can make changes up until the day of payroll. This means that employees get correct earnings and bonuses and there’s no need for the delayed corrections.

‍

Outsourced payroll FAQs

What does outsourcing payroll mean?

Outsourcing payroll essentially just means delegating the responsibility of managing your payroll tasks to an external service provider.

Instead of handling payroll processes in-house, a third-party provider (whether it be an accountant, bureau or managed payroll services) will manage most of your payroll admin.

‍

How does payroll outsourcing work?

If you decide to outsource payroll your chosen provider, here's what the process might look like:

• Data collection and setup: Your payroll provider will request the necessary employee information, including employee names, addresses, tax codes, salary details, and any other relevant data.
• Processing payroll: Once the initial setup is complete, your provider will process your payroll on the agreed-upon schedule. This includes calculating gross wages, deducting taxes, national insurance contributions, pension contributions, and any other deductions or benefits.
• Payslip generation: Your payroll provider will generate payslips for each employee, detailing their gross pay, deductions, and net pay.
• Payment processing: The payment process will be managed by your outsourced provider. Payments can be made through various methods, such as bank transfers or payroll cards.
• Compliance: Your outsourced payroll service will handle statutory compliance - submitting payroll-related taxes to HMRC and providing reports required by the government.
• Year-end reporting: At the end of the tax year, your payroll provider will prepare and submit year-end reports.

‍

How much does it cost to outsource payroll? (UK)

The cost of outsourcing payroll in the UK will vary depending on the size of your company, the number of employees, the complexity of your payroll processes, and the level of service required.

Roughly, outsourcing payroll in the UK ranges from approximately £20 to £150 per employee per year.