What is ‘Payroll Outsourcing’ and why do it?

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In the latest UK200Group blog post Karen Thomson, Head of Payroll and Partner at Armstrong Watson discusses the benefits of payroll outsourcing

Karen Thomson
According to Investopedia, “outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff.”

Whilst outsourcing is a practice usually undertaken by companies as a cost-cutting measure, there are lots of other benefits to outsourcing too:

• Reduces costs – staff and systems
• Ensures full control and compliance
• Helps resolve any process issues and reduces risk of errors
• Minimises leakage of payroll data, thus ensuring the General Data Protection Regulations
(GDPR) are adhered to
• Provides better management information
• Improves the employee experience (especially where an employee portal is available)
• Easily enables acquisition and/or disposal
• Integrates processes

The financial commitment of employing a qualified and/or experienced payroll professional is circa £18,500 - £25,000 per annum plus on costs in the North and even more in the South. In addition, there are software fees for the payroll system and resource requirements to keep on top of legislation. Plus, if a company workforce is over 250 employees and or you operate a weekly or complex payroll, you may also find more than one payroll professional is needed.

A typical payroll process scope for a fully managed payroll service

• Collect and send payroll data to provider
• Provider inputs/imports data
• Transactional processes take place – gross to net
• Delivery of payroll outputs to client
• Submissions to third parties including HMRC real time information
• Provider provides management information (do you need tailored)
• Provider manages queries from client – not normally from the employees

Getting the right deal for you

It is important to understand the business case for outsourcing, so when speaking to service providers be very clear about your needs and understand how they may (or may not) be able to meet these. Sometimes you may have to be flexible in your choices and remember, if outsourcing your payroll, this won’t often include other areas such as a purchase ledger system!

What to expect from outsourcing

• You remain accountable for your payroll
• An external party will take on the responsibility for the everyday processing of the payroll
• There will be a formal contract in place, often referred to as a ‘Service Level
Agreement/Engagement Letter’
• Typically the outsource contract would be expected to continue for 3 to 5 years, (due to the
potential large undertaking of bringing it back in-house.)
• You may need to make changes to the way in which you work to make it work!

Key traits of a great payroll service provider

When comparing service providers it can feel like apples and pears, but there are a few key areas that can make a huge difference to the level of service you receive, from the systems used - i.e. are they future proofed? - through to size, scale, experience, plus the ability to offer additional services too.


Sometimes size really does matter! Engaging with a payroll provider with a team of professionals to hand can provide the reassurance needed for contingency should your dedicated member of staff (assuming the provider offers one) be absent.

Qualifications and Experience

Qualifications and membership of a recognised professional body, such as the Chartered Institute of Payroll Professionals (CIPP), offers reassurance of robust training, however, in addition, having experienced people – who are constantly updating and upgrading their skills and knowledge - is equally important with a continuing abundance of new legislation impacting payroll operations.


Non-compliance can lead to very large penalties and, of course, it is vital that if your provider requires information from you to operate within the legislation you will need to comply, for example; setting up a pension scheme if appropriate to allow the provider to take care of your automatic enrolment obligations. With this in mind, when choosing a service provider you need to satisfy yourself that they have clear procedures in place and ask to see evidence of this. This could be in the form of a Bacs audit certificate (where the provider is Bacs accredited) or an accreditation certificate such as the CIPP’s Payroll Assurance Scheme or similar.

Future Proofing & Growth

Your company may be looking to grow, or perhaps you are looking at other business systems? Will your payroll provider grow and develop with you? Do they have a strategy in place which is aimed at providing even more benefits to their customers?

Additional Services

Are you fed up of processing payments to your employees by cheque, or having to log on to internet banking? If so, then using a provider that is Bacs accredited might be for you. In addition, perhaps you would also like your provider to be able to take care of third party payments e.g. to HMRC on your behalf?

Data Protection

GDPR/Data Protection should be of high importance to businesses. When choosing a provider it is crucial to check they are on top of this, both from a system security aspect but also processing.

Cost Vs Value

As with any service a business engages in there will be a cost for that service and payroll is no different. Is cost the most important factor to you, or is getting value for money the most important? It all comes down to understanding what you need and comparing, as far as possible like for like.

For further info on outsourcing your payroll visit https://www.armstrongwatson.co.uk/services/payroll-and-employee-services,/a>

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