Should I Run Payroll In-House?

For any employer, making sure your team are paid correctly and on time is a key part of the business. There’s no faster way to ruin morale and destroy team loyalty than to miss a payment that your staff are relying on for their outgoings. So making sure your payroll is handled correctly is vital. Payroll can be run in-house or outsourced. Depending on the size of your team, the complexity of your payment arrangements, and the amount of time your accounts and/or HR function has, either one may be right for you. (We run outsourced payroll for more than one business with an internal accounts team, simply because their capacity is needed for other aspects of the business and having a regular routine task taken care of for them allows them to keep pace with other priorities.) So do you develop your own in-house payroll expertise, or do you outsource to an experienced specialist?

What Does Your Payroll Team Need to Do?

Quite often when a prospective client approaches us to take on payroll, they’ll tell us either that at first they thought the process would be quicker and simpler, or that as the business has grown they’ve found that running payroll takes longer and longer. If you’re new to employing people (for example, running a small business which is just starting to grow) you may well also think payroll will be simpler than it actually is. A payroll team will:

• Track timesheets for hourly employees
• Track commission for any employees receiving it
• Track pay changes for all employees (promotions, etc.)
• Add any new employees and update records with HMRC
• Resolve final pay for anyone who leaves the company during the pay cycle, including calculating accrued and unspent holidays
• Factor in overtime and bonuses
• Track any unpaid absences and adjust
• Track any instances of statutory sick pay (if applicable) and adjust
• Factor in any other employee perks or benefits that can affect the final pay calculation
• Calculate National Insurance deductions
• Calculate income tax deductions
• Calculate pension payments
• Calculate student loan deductions if applicable
• Review calculations to this point and confirm totals for each employee for the pay cycle
• Generate payslips for each employee for the pay cycle
• Prepare and submit a report on employees’ payments and deductions for HMRC
• Update ongoing financial records with the pay cycle’s details

The team overseeing payroll may or may not also authorise payments. If not, they’ll pass the information on to someone with that authority to complete the process. This also involves a monthly payment to HMRC (unless your business will pay HMRC less than £1,500 per month, in which case you may be able to pay quarterly). The list above is a long one. We’ve found that when we walk someone through the process, they know every step will have to be addressed, but it’s easy for people who haven’t had to do payroll to overlook several steps when thinking about the process as a whole. So does this mean you should or shouldn’t run payroll in house? Here are some questions to keep in mind.

Who Will Handle Payroll?

In the smallest businesses with employees, it’s easy to say who’ll be doing payroll – but as you grow, it may be trickier. If you think about all the steps above, you can see a case to be made that payroll would fall under accounts or HR (and in fact many SMEs have someone fill a hybrid role covering both). If these people don’t have the capacity to handle payroll, outsourcing it at least temporarily will be necessary. However, if you have the resources in your accounts or HR function to handle payroll, and you’re prepared to invest in employees to help them keep up to date with relevant legislation and regulations so that you stay compliant, in-house payroll may be the right choice.

How Many Employees Need Paying?

Running payroll for a three person business is very different to running payroll for a three hundred person business, let alone larger. There are some sizes of business where the capacity to carry out payroll accurately and on time is more difficult to find internally than at other sizes, but even where the capacity is present, it may not be the best use of those employees’ time.

Which Option is More Cost Efficient?

Payroll requires a trained professional who will need to take time whenever legislation is updated to ensure they understand the ramifications of any changes. It is also best carried out with specialist software (we’ve heard so many horror stories of payroll being done in complex Excel spreadsheets – they worked right up until they didn’t!) which is often a significant investment and which may require paying to update going forward. Ideally this software will be compatible with your main HR platform, allowing you to automate or streamline the process of tracking sick days, holiday, unpaid leave, overtime, etc. This can represent significant ongoing and up-front investments. Accountancy firms offering outsourced payroll services can amortise this cost across several clients. Depending on your situation, it may or may not be worth making this level of investment within your business.

What Risk Are You Comfortable With?

If your payroll report is not compliant as you were working with outdated understanding of the legislation, or if you miss the HMRC’s deadlines, the penalties you face are significant. Outsourced payroll solutions offer confidence that they will know the relevant legislation, and that if they have the necessary information they will deliver by deadline. In-house solutions give you tighter and more direct control over this, but with the requirement that you ensure their knowledge is kept up to date. Which option is best for your business will be informed by where you stand on all of these factors. Keeping your payroll in-house is definitely workable at any size of business, but it comes with a cost. If you want to ensure you’re making the right decision, we’d be happy to discuss your circumstances. Get in touch today.