Did you know that payroll is one of the most popular business aspects that business owners choose to outsource the most. Like many other jobs businesses don’t want to do themselves, payroll outsourcing is when they hire an external third-party provider to take care of their employee’s payment responsibilities from salary processing to tax filing and compliance.
In the UK alone, it’s believed that 61% of businesses had outsourced their payroll. This shows the effectiveness of payroll outsourcing as means for business owners to free up their time to focus on the growth of their businesses. I hope this blog post will act as a comprehensive guide for UK business owners who want to understand the ins and outs of payroll outsourcing as well as helping you decide which payroll outsourcing option would best fit your business’s needs.
What is payroll outsourcing?
To put simply, payroll outsourcing is the practice of hiring out a third-party provider, most likely a specialist payroll provider, to take care of a business’s payroll processes. This is in contrast to doing payroll in-house, where an internal employee within the business itself, is responsible for processing its payroll.
Types of payroll outsourcing
One thing that is super important to remember is that not all payroll outsourcing services are created the same. There are different options available for different needs depending on the payroll provider’s service but here are the three most common:
Full-service payroll outsourcing: Here, a full payroll outsourcing provider manages the entire payroll process from pay slip generation to leave and absence management. Normally the only thing a business must worry about is providing them with employee and business data.
Partial payroll outsourcing: When hiring a partial payroll outsourcing service, chances they will be brought on for specific tasks while the rest of your payroll responsibilities are managed in-house. A good example would be the provider having sole responsibility for tax filings or compliance while leaving the rest to business itself.
Global payroll outsourcing: This is particularly relevant for you especially if your business has multinational teams in different countries or your business is expanding outside your own country. This is due to complexities in navigating rules and regulations across different countries. A global payroll outsourcing service would provide expertise in managing global payroll for you and ensuring tax equilisation and compliance with international and national regulations.
How does payroll outsourcing work?
Despite there being many aspects to payroll outsourcing, it doesn’t necessarily have to be complicated. I’ll break down the main steps of the process:
Step 1: Understand what outsourced payroll services you require specifically and what to expect from each one.
Do you want a service that specialises in particular payroll services such as UK payroll compliance, UK tax regulations and employee payroll administration or do you want a service which covers every aspect of the payroll process?
Step 2: Create a timeline in terms of setting up and implementing the new payroll system with your outsourced provider.
How long this takes depends on the size of your business and whether you are setting up global payroll or not. This will give you a better chance working with providers in sync with your timings whilst also considering the setting up of remote payroll tools.
Step 3: Reach out and agree contract with your chosen payroll provider and set up the new payroll process.
Once you’ve agreed contract terms with a payroll provider, to set up the payroll process, it’s up to the business to transfer the relevant data needed for payroll processing depending on the agreed services that the provider will provide for the business.
For e.g., if a provider was responsible for payroll reports and audits, it would need numerous pieces of data including employee information as well as payroll transactions and pay slips.
Step 4: A small but crucial step, make sure to verify that all the data you give to the payroll provider is correct. Any incorrect data provided will lead to in-accurate payroll processing!
Step 5: Inform your in-house team about the changes to the payroll and have a parallel payroll run in-house to ensure effective delivery.
This is so important as it affects your workforce! Also be sure to give a heads up to your in-house team members already involved in the payroll process especially if you’re only outsourcing certain aspects of your payroll.
Finally for peace of mind, it’s a good idea to run an in-house payroll process at the same time as the outsourced provider to ensure that they both deliver the same results.
Advantages and disadvantages of payroll outsourcing
Let’s discuss the potential advantages and disadvantages outsourcing payroll would bring. This will hopefully give you a well-rounded view as to whether outsourcing it fully or on a partial basis is the right option for your business in the long run.
Advantages:
1. Cost-effectiveness
Cost of payroll-outsourcing is cheaper than hiring in-house. According to YouGov research, 32% of SMEs outsourced their payroll primarily because saving with outsourcing is cheaper than hiring someone to do it in-house.
Payroll outsourcing companies take advantage of remote payroll tools. Unlike internally, payroll third parties would often use remote tools to automate the payroll processes for your company. This is often cheaper and helps contribute to cost efficiencies for your business and this is more the case if you have more employees especially from different countries.
2. Compliance with payroll regulations
Having access to expertise reduces the risks of compliance penalties because of unknowingly violating global payroll regulations.
By hiring a payroll provider, you are hiring experts in tax filing and compliance in different national jurisdictions that they cover. This will almost certainly improve compliance for your businesses and gives you peace of mind with regards to important payroll deadlines and other potential issues.
3. Efficient payroll processing and timesaving
By gaining access to expertise and specific remote payroll tools, your payroll process will be streamlined unlike an in-house payroll process where slower and more costly processes are the norm.
Utilising payroll management software especially nowadays can help quicken every aspect of the payroll process from salary processing to RTI submissions and data collection.
4. Enhanced payroll data security
Payroll processing tends to involve the handling and collection of a lot of sensitive and personal information. If you hire a reputable outsourced payroll provider, there’s a good chance that they will also provide you with top security software and policies that will protect your company’s sensitive information from data breaches. This is something many companies will struggle to emulate if doing their payroll internally.
5. HR and payroll integration advantages.
An outsourced Payroll provider would also be able to integrate your payroll data with other important systems such as time tracking and attendance systems, benefits administration, HRMS and HRIS. This in turn improves data accuracy for the business and provides easier access to information.
Read more on the latest HR outsourcing trends
Risks:
Nevertheless, hiring an outsourced payroll provider does come with its risks and challenges that might make you think twice about hiring one. These are the three most common risks of outsourcing payroll vs doing it in-house.
1. Choosing the wrong provider
There are hundreds of outsourced payroll providers, but this runs the risk of choosing one that doesn’t meet your payroll needs or choosing a novice provider that increases the chances of service quality issues or hidden costs. Additionally, you’ll have to answer fundamental questions like is your provider GDPR compliant or do they understand the pensions auto-enrolment process?
Certain providers might specialise in specific countries and jurisdictions or certain payroll processes. This is important to bear in mind if you’ve opted to partially or fully outsource your payroll.
Solution: It’s important to do an audit and work out how far you’d like to outsource your payroll process before approaching prospective providers. Many providers especially those who work with payroll software will likely provide you with a demo, so you know what the process is like before you commit to a contract. Testing the new payroll provider in parallel with the in-house system like we mentioned earlier is the best way to catch any potential problems before fully rolling out the outsourced provider.
2. Lack of direct oversight of the payroll process but you’re still responsible
Whilst the provider manages your payroll processing, at the end of the day, your business is responsible for tax filings and compliance in the eyes of the law. This ties into the competency of your outsourced provider but it also runs the risk of vendor dependence, since you are running afoul of any compliance regulations is tied to them.
Solution: Like risk one, make sure to pick a reliable provider who has a good track record of filing taxes on time and accurately. Also to reduce to pitfalls of not having direct oversight unlike in-house, be sure to check out their customer support system and whether they’d provide you with a dedicated account manager or integrate them with your communication channels.
3. Onboarding issues
When starting out with an outsourced payroll provider, the prospect of transforming sensitive data as well as adapting HR and your employees to the new setup can be daunting. Teams may need time to get used to the new payroll system, which in turn can lead to potential delays and hidden costs.
Solution: Developing a structured onboarding plan with clear timelines and data validation checks. This will help mitigate the issue of potential delays. To do this effectively, you could coordinate with your provider to provide your team with dedicated support to ensure they become accustomed to the new payroll system.
Key considerations when outsourcing payroll
Outsourcing payroll can be a viable strategy for your long-term business success. However, selecting the right payroll provider is crucial to avoid issues such as hidden costs. Below are key factors to consider when choosing an outsourced payroll service:
Choosing the right payroll provider
Does your prospective provider have the right industry expertise and compliance knowledge for your business needs? The right payroll outsourcing provider for you should be well versed in the services you want them to manage as well as the relevant compliance regulations.
Are they up to date with tax and legal requirements? This could include knowledge of UK Payroll Compliance, Tax Regulations in the UK, HM Revenue & Customs (HMRC) requirements, PAYE (Pay As You Earn), National Insurance Contributions (NICs), Pensions Auto-Enrolment, and GDPR Compliance.
A reliable effective provider will help you stay compliant thereby avoiding any costly mistakes. A novice one could run the risk of compliance penalties and service quality issues.
Tax and compliance factors in payroll outsourcing
By shifting responsibility of your payroll process to a third-party provider, you have the chance to free up time in focusing on growing your business. Nevertheless, when it comes to taxes and compliance, at the end of the day, you as a business are responsible regardless of whether it was outsourced or not.
Accuracy and transparency in the payroll process is crucial. This is even more so when outsourcing it. Problems can lead to compliance issues, delayed payments and potentially an unhappy team. This is why you must ensure your provider offers real-time payroll reporting, compliance audits, and clear payroll records. This will make sure that everything is done correctly giving you peace of mind as a business owner.
Why choose Black Piano?
At Black Piano, recruiting and building remote teams is what we do best. We deal with all the administrative tasks that comes along with it including payroll, compliance and HR management on your behalf, which will allow you to free up crucial time and resources to grow your business.
As an Employer of Record, all your remote team will be employees of Black Piano, we handle payroll processing and all local employment obligations in the same way as you would in the UK.
Mind you, we’re not an outsourcing agency. We love to go above and beyond in providing a comprehensive service for you in providing with the best team for your business. We’re also very proud of the fact that we have a 98% employee retention which is a testament to our commitment to our clients and to our team.
Conclusion
Outsourcing payroll is not just a way to outsource one more administrative task. It’s also a strategically viable move that could save time, reduce your costs and ensure compliance with ever changing tax regulations.
Nevertheless, how beneficial it could be for you and your organisation largely depends on choosing the right partner who can mitigate the drawbacks of handing over responsibility to a third-party provider.
At Black Piano, we’re not an outsourced payroll provider, we go above and beyond by providing you with high performing remote teams whilst managing all the payroll and compliance responsibilities. Unlike a traditional outsourcing agency, our approach is hands on and personalised thereby guaranteeing that your team is managed as efficiently as it was in-house.
Don’t let payroll be a blocker for your business. Get in touch today.
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