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  • By Lech Handzel-Bonavia
  • Updated April 6, 2024
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Lech Handzel-Bonavia
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At RemotePad, Lech draws on his professional experience to write about employment taxes and payroll (both remote, and in-office). Lech holds a Bachelors’ degree from the University of Kent, a Master of Arts (MA) from Kings College London, and professional payroll and tax qualifications. He has 20 years experience advising on all manner of tax and business planning matters.
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UK Payroll Outsourcing

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How Companies Find Relief Through Payroll Outsourcing in the UK

Most discussions about payroll start and end with numbers – after all, that’s what payroll is all about, right? Just figures and legal requirements you need to get right. 

But what if we told you there’s more to payroll outsourcing, particularly in the UK?

According to a Deloitte survey, around 59% of businesses say cost reduction is a key reason for outsourcing. But there’s a whole other side to payroll outsourcing, especially for businesses in the UK.

While some might argue that keeping payroll in-house offers more control, let’s face facts: things have changed. 

Global expansion and remote workforces now require a level of agility and expertise that is hard to maintain internally. 

Think about it – do you want to spend your valuable time keeping up with the HM Revenue & Customs updates when you could be focusing on your business’s core competencies? Probably not.

Payroll outsourcing in the UK offers a breather from the stress of payroll processing, reduces operational costs (no need to mention the budget allocation for in-house payroll software updates and training), and risks and even enhances compliance. 

The technology aspect is equally important. Outsourcing firms have the latest software and offer advanced analytics as well as reports that can help with payroll data.

What Exactly is Payroll Outsourcing in the UK

UK payroll outsourcing essentially means delegating your payroll processes to a specialist. 

Think of it this way: instead of having to deal with tax codes and endless updates in-house, you’re handing over these tasks to a team of experts. 

But let’s be clear, outsourcing your payroll doesn’t mean you’ll offload your work and that’s all. It’s a strategic move. 

But, how is this different from handling payroll in your back office? 

When you handle payroll in-house, the legal updates and endless paperwork are all on you. You’re in charge, yes! But with that great power comes great responsibility and great headaches, sometimes. 

On the other hand, outsourcing payroll services gives control to experts who are up to speed with those tax laws and regulations that are always changing. They make sure you’re always on the right side of the law and your employees are paid correctly and on time.

Although umbrella companies also deal with payroll, they deal more with managing contract workers and handling their payroll and taxes. Payroll outsourcing, however, is a more holistic approach. It covers all tax filings and employee benefits.

How Outsourcing Payroll Services Works

Outsourcing payroll services is more of a structured process than a freestyle jig. 

Here’s a breakdown of how the collaboration with a payroll service provider typically works:

Step 1: Finding Your Fit

You need to find the right payroll partner. And you wouldn’t just ‘best payroll outsourcing in the UK’ and pick the top result. 

You have to match your company’s needs with a provider’s expertise. Look for a provider that has a track record in your industry and check out reviews and case studies. The process needs due diligence to ensure compatibility.

Step 2: Meeting

The next step is the kick-off meeting once you’ve selected a provider. It’s where you lay down your payroll issues and expectations. You’ll discuss payroll cycles and specific compliance requirements.

Step 3: Data Transfer and Integration

This step involves securely transferring employee data and other relevant information to your new payroll provider. This must be done securely to protect sensitive information. 

According to Deloitte’s Global Payroll Benchmarking Survey, data security is a top concern for companies when outsourcing payroll.

Step 4: Compliance 

Your chosen provider will start to align your payroll processes with the latest legislative requirements. They should ensure that your payroll is compliant and adheres to UK tax laws.

Step 5: Payroll Processing

Here, your payroll provider takes the wheel and processes the payroll. This involves deducting taxes and handling any other deductions like pension contributions or student loans. They also deal with the HM Revenue and Customs (HMRC), so you don’t have to.

Step 6: Reporting and Communication

Most providers will give you access to detailed reports and analytics on your payroll. This transparency ensures you’re never in the dark about your payroll status. 

Step 7: Payroll Outsourcing is Not a ‘Set It and Forget It’ Deal. 

There should be ongoing support for any queries or adjustments required, changes in employee details, or legislative updates.

Benefits of Payroll As a Service

Payroll companies partner with businesses for growth, efficiency as well as financial management.

Cost Savings

You cut down on significant costs while also outsourcing tasks to payroll services. 

A study by Deloitte found that businesses can save up to 18% by outsourcing payroll. This is simply because you save on software costs and even those expenses that come up due to payroll errors. 

And, there’s the time factor – the hours your team spends on payroll are hours not spent on growing your business.

Compliance

Keeping up with the tax laws and employment regulations is almost a full-time job. Thankfully, it’s where payroll companies shine. 

They know about all legislation changes and ensure your business is always compliant. That means no more frantic last-minute scrambles to understand the latest HM Revenue and Customs updates. 

In 2019, the HMRC reported that 35% of small businesses made payroll errors, leading to penalties. With managed payroll, this risk is reduced significantly.

Efficiency

You don’t just get it done on time. It’s accurate and the peace of mind that comes from knowing experts handle this critical aspect of your business is priceless. 

A report by PwC indicated that outsourced payroll solutions could reduce payroll processing errors by up to 50%. That means half the headaches and double the assurance.

But What About…?

Even this payroll solution has its not-so-good sides.

Losing Control

You hope the payroll companies make the right decisions, but you’re not there to oversee every move. It’s true, relying on an external service means you’re not in the driver’s seat. But, with clear communication and a reliable partner, this can be more of a ‘gaining a trusted advisor‘ situation.

Data Security 

Trusting someone else with sensitive employee data is a big deal. But let’s put this into perspective. 

Professional payroll providers have to be, given strict data protection laws, especially in the UK. They’ve got robust security measures that most in-house systems can only dream of.

Integration with Existing Systems

Ensuring your new payroll system plays nicely with your current software requires some effort, and this is where doing your homework pays off. Choosing a provider that ensures compatibility with your existing systems can turn a potential headache into a seamless transition.

Cost

Yes, outsourcing payroll is an investment. It’s not going to be as cheap as DIY, but the results are usually worth it. It’s essential to weigh the cost against the time and resources saved, not to mention the reduction in compliance headaches.

Is Payroll Outsourcing Right for Your Business?

Every decision in business is a milestone, and choosing to outsource payroll is no different. As a business leader, you understand the importance of focusing on what truly drives your company forward. 

When you outsource to payroll companies, you’re eyeing an opportunity to enhance your business’s operational effectiveness. So, what does this mean for your company’s employee satisfaction and compliance with regulations?

Firstly, think about your current payroll system’s effectiveness. Does it match your business goals, or does it demand an undue amount of your attention and resources? 

Review the last quarter – how much time did your team spend dealing with payroll issues? Now, what if you used that time for core business strategies?

The next step is to evaluate the expertise at your disposal. 

Are you constantly playing catch-up with the latest payroll regulations? The thing is, keeping up to date on legislative changes is a full-time job in itself. Companies that outsource payroll leverage specialized expertise to compliance and precision, something that’s increasingly crucial in the UK, where payroll regulations are as dynamic as the market itself.

Then, think about scalability. 

As your business grows, does your payroll system adapt to new demands? 

One of the understated benefits of payroll outsourcing is its scalability to take your needs without the headache of changing your internal processes.

Consider the technology too. 

Today’s payroll solutions offer analytics and insights that can drive strategic decisions. Ask yourself if your current setup delivers this level of intelligence.

Then, more importantly, there’s the peace of mind factor. 

There’s this reassurance in knowing that experts are handling one of the most critical aspects of your business. They are specialists who can do it more efficiently and accurately.

Frequently Asked Questions

What is the difference between payroll outsourcing and PEO?

Payroll Outsourcing and Professional Employer Organization (PEO) services are approaches to managing aspects of human resources, but they serve different purposes.

Payroll outsourcing means hiring an external company specifically to manage your payroll processing. The primary function is calculating employee pay, deducting taxes, and ensuring accurate and timely payment distribution. It focuses solely on payroll activities and does not typically extend to other HR responsibilities. Payroll outsourcing is ideal for companies that want to streamline their payroll process without changing their HR structure.

Professional Employer Organization (PEO), on the other hand, offers a more comprehensive solution. When you partner with a PEO, your employees technically become employees of the PEO. This co-employment arrangement allows PEOs to manage a wide range of HR functions. They can also offer small and medium-sized businesses the benefits and expertise usually available to larger corporations. They’re suitable for businesses looking for an all-in-one HR solution and not just assistance with payroll.

What is the difference between payroll outsourcing and a UK umbrella company?

Payroll outsourcing is a service businesses use to manage payroll for their direct employees, while individual contractors use a UK umbrella company to handle their employment paperwork and payroll.

cropped Lech Handzel Bonavia
Article By

Lech Handzel-Bonavia

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At RemotePad, Lech draws on his professional experience to write about employment taxes and payroll (both remote, and in-office). Lech holds a Bachelors’ degree from the University of Kent, a Master of Arts (MA) from Kings College London, and professional payroll and tax qualifications. He has 20 years experience advising on all manner of tax and business planning matters.

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