BookCheck is Recruiting! Find out more

Key Questions About Outsourcing Payroll

What are the advantages / benefits of outsourcing payroll?

Above all peace of mind by removing worry and problems, sometimes a reduced cost and greater reliability and accuracy. Outsourcing means that you avoid errors and late payments with all the staff upset that this brings with it. Incorrect payroll can result in fines and penalties from HMRC with all the associated management time that these can involve.

When you know that your employees are being paid correctly, on time and that your compliance responsibilities are being taken care of, you can be at ease and concentrate on running your business.

Outsourcing gives your business access to essential skills and knowledge that you may not otherwise have, at a low, affordable cost.

Using a trusted, reliable and professional provider will give you and your staff the reassurance and confidence that your payroll responsibilities are being properly and efficiently discharged.

At what point does it become beneficial to outsource payroll?

When the overall net benefits are significant. These could include reducing costs, removing staff worries, avoiding errors and fines and releasing staff time for more profitable work.

The cost of in-house staff tends to be overlooked or underestimated – be realistic. Include cover, holiday pay and sickness. Inadequately trained staff can lead to expensive mistakes and compliance penalties. This is especially a risk with new or part time staff which can leave you vulnerable.

If the payroll is in any way a significant worry or a major distraction, then it’s almost certainly worth outsourcing to get rid of the issue.

What should I look for in an outsourced payroll provider?

All providers will list the same tasks and say how good their service is, which can make it difficult to separate them. So check their claims by following up at least three and preferably six references. Phone these references for the most informative feedback. If references are not readily forthcoming, ask yourself why.

Choose a well-established service using a settled down methodology. The bureau should have plenty of staff resources with sufficient spare capacity, be up to date with technology, provide online payslips and be fully capable of handing all aspects of your pension auto-enrolment.

Are there any drawbacks in outsourcing payroll?

Quality and reliability may not be good - just by being an outsourced bureau service does not guarantee satisfaction. You could be tied in for the length of the contract – three months is enough. Watch out for poor communications causing frustration.

The security might be inadequate, exposing you to risk – so it is always a good idea to check it.

Make sure that you will have a dedicated point of contact.

Is outsourcing payroll more cost effective than doing it yourself?

Generally speaking yes. The cost of an outsourced bureau service is pretty modest in the scheme of things. A business will tend to undervalue its own internal resource cost. There is a surprising amount of time required in all aspects of running a payroll. There is also an extra cost when it’s delayed or wrong, possible even resulting in fines or penalties.

Don’t forget the cost of the software and support plus the computer IT. Handling the pension auto enrolment (administration, letters, opting in and out, queries) will be another in-house cost.

Is CIS covered?

This varies. Check the references to prove that the bureau really does have experience and does a good job.

How secure is outsourced payroll?

This varies and of course needs checking. The security arrangements provided by a good bureau provider are likely to be a lot better than in-house arrangements, both in terms of backups and in confidentiality. Less than that should be avoided, even at lower cost.

How much does outsourcing payroll cost?

It very much depends on the numbers of employees, the frequency of paying (weekly, two weekly, monthly) and the level of assistance required with pension auto enrolment. The easiest way to find out is to ask for a quote. Fees vary enormously. Beware if the fee quoted is lower than average as, like most things in life, you get what you pay for and you may be risking unreliability or worse. A bureau that quotes too low a fee may not be able to deal with any unique aspects of your payroll.

Does it matter what software is used to run the payroll?

Whilst Sage is a popular choice with in-house systems it’s what to avoid which is important – probably any system which is less than five years established needs checking carefully. This is the approximate time to straighten out a new system which has to be 100% correct as there is no room for anything less with payroll.

We are using Sage payroll now. Is there any problem with changing from this?

It doesn’t matter if you are using Sage, Moneysoft, QuickBooks, BrightPay, Xero or any other software. The only thing that matters is the software used by the provider - the most likely system used will be Iris. This is the market leader for payroll – it’s used by the big four accountants and over 50% of the top 100 firms.

Do the advantages of outsourcing payroll outweigh the disadvantages?

They very much should do and by a significant margin. Arguably the biggest advantage is simply peace of mind which is quite difficult to value but should be affordable.

How do I evaluate different outsourced payroll providers?

The best way is to check references – at least three and preferably six. That is totally unbiased information, free of web marketing copy fluff. Beware of a lack of references – why would that be? Phone the references to obtain the maximum possible feedback information.

You can use a checklist to evaluate options which should include: how long have they been established, how strong financially are they, whether they can cope with your pension auto enrolment responsibilities, cost, notice period, speed of response to queries, online payslips provided.

How do I know if my outsourced payroll is being done correctly?

No news is generally good news. But fines imposed by HMRC for late RTI submissions or the pension regulator are bad news.

Employees are a good guide. If one has a problem, there will probably be nine others that have but don’t realise it. All timescales should be met – the actual pay run, submitting RTI to HMRC, on time paying of HMRC and your pension provider.

Does an outsourced provider cover expenses and benefits in kind?

Probably but this needs checking. This can save a lot of effort as the payment is included with the payroll.

How easy is it to outsource payroll?

It should be straightforward. Any good provider will guide you through this and take charge - then just follow their instructions. It’s a matter of transferring the employees’ current payroll data to the new system, understanding and settling an ongoing system and a timetable for processing information each pay period. Then of course they should also communicate well.

How long does it take to outsource payroll?

Firstly the time it takes you to make a decision. Then, as a rule, allow at least two weeks, ideally a month before the first pay run. In that time the provider will establish all the ins and outs of your payroll and will agree a timetable. This will cover the method of advising changes ongoing, like for new employees or pay rates.

If I outsource payroll and I change my mind, can I bring it back in house?

Yes, subject to your contract. It’s the same process but in reverse.

If I outsource payroll how long will I be tied into the contract?

It’s whatever you agree. Terms vary enormously. It’s often one year but can be as much as three years. It should not need to be more than three months – otherwise you should object.

What are the signs that I should look out for that tell me I need to outsource payroll?

Problems! Errors and fines from HMRC for late RTI submissions or penalties from the Pension Regulator, complaints from employees, lateness, stress, shortage of resource at the critical times (lack of cover for holidays or sickness) and worry.

When is the best time of the year to outsource payroll?

It really doesn’t matter for you. The provider may prefer a tax year end at 31st March as it’s easier for them. If you need to move, then the sooner the better, even if you have to pay a notice period.

Are there any GDPR implications of outsourcing payroll?

Not for yourselves as long as the provider is all signed up to this, ask them formally.

What accreditations should an outsourced payroll provider hold?

Nothing formal is necessary or common. The proof of the pudding is in users’ experiences so check plenty of references, thoroughly.

If I outsource payroll, by when in the month would I need to advise the provider of any changes?

You settle a timetable with your provider, then you both know. Generally at least 2 – 3 days before running the payroll

If an outsourced payroll provider makes a mistake who is liable?

That’s a good question! If it’s clearly 100% their mistake, then in principle the provider is liable. The most likely risk is overpaying. It would be unusual if the employer had not first signed off the pay run and thus taken responsibility, but it can happen. The other key risk is late filing with HMRC which causes an automatic fine.

Will an outsourced payroll provider also handle auto enrolment?

This is an integral part of running the payroll as the pension is deducted from the pay. There are three levels of service provided. Full – when the provider calculates the pension and accounts to the pension company. Medium - when the provider calculates the pension but does not account to the pension company. Light – when the provider simply inputs the pension calculated by the employer or pension company. The most popular pension provider is NEST and generally the payroll provider will include a Full service for this choice.

How are payslips provided?

Nowadays this really has to be online, electronically. No paper, it’s much more secure, nil cost, a lot quicker and much preferred by employees.

Does an outsourced payroll provider just provide the paperwork or actually action the pay itself?

Many providers do not offer a payment service. Some will make the payment. If you wish, this can be directly from your bank account or you pay in advance through the provider’s bank.

Will I have a dedicated point of contact?

Often it’s not provided but it’s very beneficial to have a dedicated person and well worth insisting upon. Then the payroll officer builds up a really good understanding of the peculiarities of your business. This allows them to recognise when something isn’t right and to take action promptly. Someone not familiar with the payroll might not spot this. It also makes running the payroll much easier and quicker each payroll run because it’s so familiar.

What information will I have to provide my outsourced payroll provider with?

Initially the standing data from the current payroll system, then ongoing information each pay run. The standing data (up to 60 fields of data plus year to date pay and tax deducted) is normally supplied in computer files and the payroll provider will guide you in the process, otherwise it’s done manually. The ongoing information can be provided in a number of ways: email, Excel or data portal. A portal is often the best method as it requires a discipline on the quality of the information which doesn’t exist otherwise.

Will my staff be able to contact my outsourced payroll provider?

Yes, this is essential. The most important word in payroll is communication so nothing must get in the way.

Is there a fee for setting up outsourced payroll?

Sometimes there is a setup fee, sometimes not, so check the proposal

Do I need to notify HMRC that I am outsourcing payroll?

No. There’s a nice simple answer.

When in the month will I need to provide my payroll information to my outsourced provider?

This is mutually agreed. Generally no later than 2 to 3 days before the pay run

Should I use my accountant for payroll?

There is no particular reason at all for this. It may seem simpler to have one firm do everything which is fine if they are as good as a separate provider and don’t charge more. Funnily enough many accountants would prefer not to handle your payroll – it’s usually a loss maker and a bit of a bother but they feel they need to say yes.

Should I have a non disclosure agreement with my outsourced payroll provider?

It would be confidential anyway but there is no harm in having one

What if my outsourced payroll provider goes out of business?

You need to ensure that you will be able to obtain the latest payroll data from their system – to be transferred to a new provider. Going bust should not prevent that but it’s possible there will be a problem. If the worst happens you would resort to using your last payroll reports and set up manually from there. To avoid a complication, check the credit reference of the provider before you contract with them and keep an eye on it.

How secure from a cyber security perspective is outsourcing payroll?

It’s very likely that your payroll being outsourced with be very much more secure than you could achieve in-house. But it’s also possible that it could be less secure. So check the security systems and credentials of your intended provider.

Will my outsourced payroll provider need access to my business bank account?

Not unless you ask them to pay your employees directly from your account.

What does PAYE mean?

In the 1940s during the Second World War, Sir Paul Chambers came up with an innovation that changed the economy. Before then, most people paid income tax in arrears, calculating what they owed and paying a lump sum. The system was clunky and fostered resentment every time tax came to be collected. Chambers’s idea was that pay should be deducted directly from most salaries before it reached the employee’s wallet. The system was called pay as you earn or PAYE.

Are there any IR35 implications of outsourcing payroll?

No. HMRC will never object to someone being an employee rather than not.

Is an outsourced payroll suitable for all kinds of business?

Yes. There is no reason why not and plenty of reasons why it should be suitable and a good idea. It’s suitable for a payroll of one person upwards to any number. In fact it’s arguable more suitable for the smaller payrolls as with these businesses there is generally less payroll and auto enrolment knowledge and expertise.

Our business segment is very specialised and needs specialist knowledge to ensure accurate and timely payroll, how can an outsourced provider compete?

That should not be a problem for a professional firm. If the employer can understand it then the payroll provider can too. It’s usually the other way round – the employer is under the mistaken belief that everything is alright.

What happens with an outsourced payroll provider in the event of payroll fraud?

That’s a tricky question but funnily enough it’s a really low risk, even in modern times of scams etc. It depends however on the particular nature of what has happened. There is a possibility of the pay being inflated or paid to a bogus employee. That should be controlled by management checking and signing off the payroll at each run. Outsourced payroll staff will be supervised and have balances and checks in place, whereas an in-house solution is all too often a single point of failure.

What are electronic payslips?

A secure online way of employees accessing their payslips 24/7. They should be easily viewable on a smartphone. A dashboard is provided for employers. It also includes the year end P60 form, all together in one place. It’s updated at the payroll run so there is no postal delay or cost and no effort in the distribution. Having access to electronic payslips allows employees to access their information whenever they want to, removing unnecessary queries.

What is a data portal?

A method of submitted payroll data such as standing information for a new employee and ongoing pay data such as number of hours worked. It has the advantage of less errors and omissions because it has in built data disciplines – just like online ordering systems.

We use weekly pay – is there any problem with outsourcing this?

Most providers will offer this service but not all. Clearly by running 52 times a year the costs are a lot more. It’s worth trying hard to change to monthly or 4 weekly. Not only will this save cost but it’s far less stressful than every single week.