In-house vs outsourced payroll for small businesses

Key takeaways

In-house vs outsourced payroll depends on headcount and complexity. For a 25-person business paid monthly, in-house payroll takes roughly 9 to 10 hours a month, about £2,600 a year of an office manager's time plus software. A bureau at an illustrative £5 per payslip costs about £1,500. Payroll admin, such as timesheets and queries, can be outsourced separately.

• In-house: about £2,600 a year of manager time for 25 monthly payslips.
• Outsourced: about £1,500 a year at an illustrative £5 per payslip.
• In-house: must report to HMRC on or before each payday.
• Outsourced: timesheet collation and staff queries can move too.

What does running payroll involve?

Running payroll means calculating pay and deductions, paying staff, and reporting pay and deductions to HMRC through Real Time Information (RTI) on or before each payday. It also covers pension auto-enrolment, statutory payments such as sick and maternity pay, starters and leavers, and payslips. Mistakes lead to unhappy staff and HMRC corrections.

• In-house vs outsourcing: which model is more cost-effective?

What does in-house payroll cost?

For 25 monthly-paid staff, collecting hours, checking changes, running payroll, submitting to HMRC and answering questions takes around 9 to 10 hours a month. At £23.20 per worked hour for a £35,000 office manager, that is about £2,600 a year. Add payroll software, unless you qualify for HMRC's free tools, and pension provider admin.

• The management time cost of an in-house team

What does outsourced payroll cost?

Payroll bureaus typically charge per payslip or per pay run, with extras for starters, leavers and year-end. At an illustrative £5 per payslip, 25 monthly payslips cost about £1,500 a year. Quotes vary with frequency, complexity and service level, so compare them on the same scope.

What stays with you if you outsource payroll?

The legal responsibility stays with you as the employer. You still approve pay, provide accurate hours and changes on time, and fund the payments. A good split is: you approve, the bureau calculates and submits, and an admin team collects timesheets and answers routine staff questions.

• In-house vs outsourced HR admin for small firms

When should payroll stay in-house?

For very small, stable payrolls where the owner runs it in under an hour a month using simple software. Also when pay is so variable, with complex shift premiums, that the time spent explaining it to a bureau would exceed the time saved.

• When is in-house cheaper than outsourcing?

When is outsourcing payroll the better choice?

When headcount is growing, when only one person knows how payroll works, when shift and overtime data takes hours to collate, or when errors have caused complaints. Outsourcing the collation and admin often saves more time than outsourcing the calculation itself.

• Key person dependency: when one person holds it all
• BPO Solutions for UK businesses

What about payroll data protection?

Payroll data includes bank details, National Insurance numbers and sometimes health information for sick pay, so it needs care. Any provider is a processor under UK GDPR and needs a written contract; limit access and use secure file transfer, never email attachments.

• Data processing agreements for outsourcing

What does a payroll calendar look like?

A simple monthly calendar keeps payroll on time whoever runs it. Agree dates with the bureau or in-house team and stick to them, because late changes cause most payroll errors.

• Day 1 to 5 before payday: hours, overtime and changes submitted.
• Day 3 before payday: draft payroll checked and approved.
• Payday: staff paid and HMRC report submitted on or before it.
• After payday: pension contributions sent and queries answered.

• Compliance admin burden: what you can hand off

What does this look like in practice?

A pattern we see in UK hospitality businesses: rotas, tips and overtime are collated by hand from several sites before payroll. Moving the collation and staff queries to a managed admin team, with a bureau running the payroll, cuts the manager's month-end work to approval.

• See client work

Payroll checklist

Use these steps to compare.

• Log hours spent on payroll each month.
• Separate collation, calculation and queries.
• Get bureau quotes on the same scope.
• Decide who approves pay before each run.
• Put a processor contract in place.

Next step

Tell us your headcount, pay frequency and where the time goes. We will cost payroll in-house and outsourced in a 30-minute call.