Aug 6, 2023

Cost Analysis: Investing in Payroll Services vs. Hiring a Payroll Team in the UK

Introduction to Payroll Management for Small Businesses in the UK

In the heart of the UK's dynamic business environment, the importance of efficient payroll management cannot be overstated. For small businesses, payroll isn't just about disbursing salaries; it's about ensuring compliance, managing benefits, and navigating the intricacies of HMRC regulations. Understanding the financial and operational implications is crucial with the ever-present debate between outsourcing to a payroll service provider and maintaining an in-house payroll team.

The Financial Implications of Hiring an In-House Payroll Team

Salaries & Benefits:

Hiring in-house means budgeting for salaries, pensions, and other benefits. The average payroll professional's salary can range significantly in the UK based on experience and location, especially in major cities like London. Let's delve into the salary ranges for payroll professionals in London compared to those outside London.

London:

In London, payroll professionals can expect to earn a competitive salary. Based on recent data:

Entry-level Payroll Professionals: The starting salary for those new to the payroll field in London typically ranges from £25,000 to £30,000 per annum.
Mid-level Payroll Professionals: With a few years of experience, payroll professionals can expect to earn between £35,000 and £45,000 annually.
Senior Payroll Professionals: Those with extensive experience and perhaps a managerial role can command salaries of £50,000 to £60,000 or even higher.

Outside London:

Outside of London, the salary scales might be lower due to living costs and market demand differences. Here's a general overview:

Entry-level Payroll Professionals: Starting salaries for payroll professionals outside of London typically fall between £20,000 and £25,000 per annum.
Mid-level Payroll Professionals: With some experience, these professionals can expect to earn in the range of £30,000 to £40,000 annually.
Senior Payroll Professionals: Senior roles outside of London can fetch salaries between £45,000 and £55,000.

Training & Development:

The payroll industry is ever-evolving. Regular training sessions, seminars, and courses are essential to keep the team updated, adding to costs. For instance, when new members join the payroll team, they often require an induction to understand the company's specific payroll processes, software, and policies.

Initial training can range from £500 to £2,000 per employee, depending on the payroll system's complexity and the training duration. Moreover, If the company adopts new payroll software or updates its existing system, the team will need training to navigate and utilise it efficiently.

Software training can vary based on the software provider. Some providers offer complimentary basic training as part of the package, while advanced training modules cost between £1,000 and £3,000. Furthermore, the UK's payroll regulations, especially those related to tax (HMRC guidelines) and employee benefits, can change annually. Regular workshops or courses are essential to keep the team updated. Regulatory training courses can range from £200 to £1,000 per session, depending on the depth and provider of the system.

Infrastructure & Technology:

Investing in the latest payroll software, cloud-based storage solutions, and other tech infrastructure is vital. Moreover, with the rise of mobile apps in the payroll industry, businesses might need to invest in platforms offering mobile solutions for easier employee access.

Beyond the apparent costs, there's the price of recruitment, potential turnover, and the risk of errors leading to HMRC penalties.

The Financial Implications of Investing in Payroll Services in the UK

Service Fees:

While many providers offer a fixed fee, some might charge based on the number of employees, payslips, or additional services like integrated HR platforms. Understanding the breakdown of these costs and any potential extra costs is essential. The rough range for payroll service fees for companies with 20 employees in the UK could be from £100 to £150 per month or more, depending on the provider and the specific services included. It's essential to reach out to individual providers for precise quotes and understand their full scope of services. In most cases, the fees only have the software cost, requiring customers to pay additional fees for managed services.

Setup & Transition:

Transitioning to a new system comes with its costs, both financial and in terms of time. However, once set up, businesses often find that outsourced services offer a more streamlined payroll solution. The average time to set up or transition to a new payroll system can range from one to three months. However, this is a general estimate, and the actual time can vary based on the specific circumstances of each company when dealing with the following factors:

Registration with Authorities:

According to GOV.UK, getting your employer's PAYE reference number can take up to 15 working days. HMRC also mention that businesses can only register for up to 2 months before paying their employees.

Data Migration:

This process can take anywhere from a few days to several weeks, depending on the amount of data, its complexity, and the efficiency of the tools used.

System Configuration:

Setting up the system to match your company's specific needs, including pay structures, benefits, tax codes, and other configurations, can take a few days to weeks.

Training:

Depending on the software's complexity and the users' proficiency, training can range from a few days to a couple of weeks.

Testing:

Before going live, it's crucial to run several test payrolls to ensure accuracy. It's also worth noting that while the initial setup and transition phase might be time-consuming, the long-term benefits of having an efficient and accurate payroll system can significantly outweigh the initial investment in time and resources.

Savings & Efficiency:

The potential savings from reduced errors, automated processes, and expert advice can be anywhere from 5 to 10 hours each pay period by outsourcing their payroll. Moreover, providers often handle important payroll deadlines, ensuring compliance without the business owner's constant oversight.

Benefits of an In-House Payroll Team

Immediate Oversight:

Having the team within arm's reach allows for real-time problem-solving. It also offers more personalised management, understanding each employee's specific needs.

Customisation & Flexibility:

In-house teams can adapt quickly to changes, be it new hires, terminations, or other payroll changes.

Data Security:

All data remains in-house, which can sometimes offer an added layer of security, especially if the business has a robust IT infrastructure.

Top 5 payroll software for small businesses in 2024

Managing payroll can be a headache for small business owners. But with the right software, it doesn't have to be. Check out our top recommendations!

Benefits of Payroll Services in the UK

Expertise & Compliance:

Top payroll service providers pride themselves on their expertise. They stay updated with HMRC regulations, ensuring businesses remain compliant. This expertise is especially crucial for companies with international employees, where payment processes might differ.

Scalability:

As the business grows, a good payroll service provider scales with it. Whether you're hiring ten or a hundred new employees, the provider can handle it without a hitch.

Integrated Solutions:

Many providers offer integrated solutions, combining payroll with HR solutions, benefits management, and more. This holistic approach can be a boon for businesses looking for an all-in-one solution.

Key Considerations for UK Businesses When Choosing Payroll Solutions

Business Needs & Size:

A startup with a team of ten has different needs than a small business poised to scale up rapidly. Understanding current and future needs is crucial.

Industry-Specific Requirements:

A restaurant might have different payroll considerations compared to a tech startup, especially concerning part-time workers or contractors.

Feedback & Reviews: Looking at feedback from other clients can offer insights into a provider's customer service, efficiency, and reliability.

Case Study: Swim C Transition to Outsourced Payroll Services

Swim C, a reputable swimming instruction company in the UK, faced a common challenge for businesses with a mix of full-time and part-time employees: managing a complex payroll system. With a team comprised mainly of part-time workers, the intricacies of scheduling rotas, validating timesheets, calculating holiday pay for casual workers, running payroll, and reporting to accountants became increasingly cumbersome.

Swim C's payroll complexities were multifaceted:

Rota Scheduling: With a team of part-time workers, ensuring everyone was scheduled correctly and efficiently was a task.
Timesheet Validation: Ensuring that hours worked matched hours paid required meticulous checking and validation.
Holiday Pay Calculations: Casual workers have different holiday pay calculations than full-time employees. Ensuring accuracy in these calculations was vital to maintain employee satisfaction and legal compliance.
Reporting and Journals: Once payroll was completed, the data had to be accurately reported to accountants, ensuring that all financial records were up-to-date and correct.

The Solution:

Swim C turned to Moonworkers, a payroll service provider known for its efficiency and cost-effectiveness. With Moonworkers:

Integrated Systems: Moonworkers provided an integrated system where rota scheduling, timesheet validation, and payroll ran seamlessly.
Automated Calculations: The challenge of calculating holiday pay for casual workers was resolved with Moonworkers' automated system, ensuring accuracy and compliance.
Efficient Reporting: The process of submitting journals and reports to accountants was streamlined, reducing administrative burdens on Swim C's management.

The Outcome:

Swim C now pays only £138 for 25 employees each month, a testament to the cost-effectiveness of Moonworkers' solution. They achieved significant financial savings, and the operational efficiency and peace of mind gained from knowing that payroll was accurate and compliant were invaluable.

By transitioning to Moonworkers, Swim C could redirect their focus from administrative tasks to their core mission: providing top-notch swimming instruction. This real-world example underscores the potential benefits of outsourcing payroll services, especially for businesses grappling with part-time and casual worker compensation complexities.

Conclusion

The decision between an in-house team and an outsourced payroll service isn't black and white. It's a nuanced choice, dependent on the business's specific requirements, size, and long-term goals. Whether leaning towards a payroll company offering a fully managed service or considering building an in-house team, the key lies in understanding the full spectrum of costs, benefits, and potential challenges.