Your guide to payroll outsourcing: what are the benefits and how does it work?

What is payroll outsourcing?

Payroll outsourcing is the practice of a company hiring a specialist third-party provider to manage some or all of its payroll operations. These payroll outsourcing services can include wage and salary calculation, tax, payroll processing and payments, reporting, compliance, record-keeping, and HR tasks.

Outsourcing payroll is common practice for companies where the demands of their payroll function outweigh their in-house capacity or expertise, ensuring reliable, compliant management of all payroll responsibilities.

How does payroll outsourcing work?

Payroll outsourcing works differently depending on the provider you choose. A high-quality payroll outsourcing company will follow these steps:

1. A fully managed onboarding phase: Your employee data, including hire dates, job titles and pay rates, is transferred securely to your payroll outsourcing provider.
2. Reliable, accurate, and compliant monthly payments: Payments are calculated, relevant payroll deductions are applied, and employees are automatically paid on time on your behalf.
3. Secure employee self-service portals: Employees and managers can easily and securely log time, view payslips and more via cloud-based payroll software and apps.
4. Monthly, quarterly, or annual reporting: Benefit from reports that are adapted to your workflow and help create efficiencies across your payroll and HR functions.
5. Ongoing, expert support: Receive on-demand support from dedicated payroll specialists to help maximise the value of your service.

There are pros and cons to every business decision, and payroll outsourcing is no different. Before partnering with a full-service payroll provider, employers should make sure the vendor is capable of meeting all of their requirements and has a reliable track record.

Benefits of payroll outsourcing

Employers who don’t have the administrative resources or the expertise to run payroll on their own may want to seek professional assistance from a payroll company with online services. Other reasons for outsourcing payroll are that it helps:

• Save time
  When employers reduce the administrative burden of payroll, they often have more time to focus on other initiatives important to growing their business, such as product development, client service and sales.*
  
  
• Minimise payroll errors
  Payroll providers automate many of the labour-intensive aspects of payroll, thereby reducing the mistakes that commonly result from manual calculations and data entry.
  
  
• Improve security
  Outsourcing payroll to a reputable provider that invests in state-of-the-art technology and has redundant backup and multiple server locations can help employers safeguard their confidential data.
  
  
• Maintain compliance
  Providers stay on top of changing government regulations so employers don’t have to and will often take the lead in filing all paperwork necessary for payroll compliance.
  
  
• Integrate data
  When payroll is fully integrated with time and attendance, benefits and other HR applications, it improves data accuracy and makes it easier to access information through single sign-on.
  
  
• Facilitate employee self-service
  Full-service managed payroll typically allows employees to view their pay information, log their hours and manage their deductions – all from a mobile device.
  
  
• Reduce costs
  Payroll providers charge fees, but when compared to the cost of the fines and penalties that can result from mistakes, outsourcing payroll may actually save businesses money.

What payroll functions can be outsourced?

If you decide to outsource your payroll to a provider, there are many functions they fulfil, including:

• Running payroll and calculating employee pay
• Making BACS payments
• Calculating payroll taxes
• Filing mandatory government reports
• Paying employee benefits
• Deducting National Insurance or pension contributions.

When does your business need to outsource payroll?

You need to outsource payroll when you:

• Need your staff to develop the workforce
• Want to optimise HR processes and have more visible costs
• No longer have the in-house skills to manage payroll
• Must ensure your business is compliant and costs controlled
• Want payroll services and expertise available at all times.

If you don’t have HR, finance or admin staff already in place, outsourcing payroll to payroll experts could be the right option. Businesses of any size and in all industries can benefit from outsourcing payroll. It’s especially helpful if your business:

• Has strategic tasks that require HR, finance and admin
• Needs payroll continuity and disaster recovery
• Is affected by current or future regulatory changes

What features do payroll outsourcing providers offer?

Payroll outsourcing providers that have the knowledge and technology necessary to produce accurate, timely results generally offer these key features:

• Payroll processing that integrates with an accounting system, if needed
• Payroll tax filing
• Employee self-service anytime, anywhere, from any device
• Year-end processing, including P60, and relevant submissions to HMRC to ensure compliance at all times
• Attachment of earnings orders
• Payroll and custom reporting
• Employee records management
• RTI starter/leaver reporting
• Accessible client support

How to choose a provider for outsourcing payroll

If you’re interested in outsourcing your company’s payroll to a trusted provider, make sure you do your research. A professional and reputable outsourced provider will take away the complexity, time and cost of handling payroll in-house and the risk of penalties for late PAYE payments.

Equally, though, an unreliable provider could risk the security and confidentiality of your employee data, so always question a potential provider thoroughly about their data security and whether they use software as a matter of course.

When assessing potential partners, employers generally follow these steps to ensure that outsourcing payroll is a success:

1. Determine requirements
   Multiple pay frequencies and employee classifications can make payroll complicated.
   
   
2. Address compliance
   Adhering to UK PAYE and RTI requirements — especially alongside international payroll rules — adds another layer of complexity for payroll providers.
   
   
3. Evaluate vendor history
   Reputable providers tend to have stable ownership, strong finances and a track record of successful implementations.
   
   
4. Look at peer reviews
   Industry analysts and clients who have used the provider’s payroll services can provide outside perspective and help validate decisions.
   
   
5. Secure stakeholder buy-in
   Outsourcing payroll is often easier with the full support of employees and senior leadership.

What to ask when outsourcing payroll? 

When considering whether or not to outsource your payroll to a provider, make sure you ask them the following questions:

• What basic and advanced services do you offer?
• How much experience do you have managing payroll for clients?
• Do you have a particular area of expertise (e.g. in large corporates, charities or small businesses)?
• How many payroll experts do you have on your team?
• What availability will your payroll experts have to answer any questions as they arise?
• How many clients do you have and how long have you been providing payroll services for them?
• How do you anticipate meeting this company’s compliance obligations?
• Do you calculate tax deductions per employee?
• What are your rates for running payroll per employee?
• What expertise do you have in RTI reporting?
• What guarantees can you provide regarding employee confidentiality?

Why should you outsource your payroll?

Your business might consider outsourcing payroll to a full-service provider if you:

• Lack the resources (personnel and technology) to run payroll effectively
• Have been penalised for incorrect or late tax payments
• Are unable to keep pace with changing employment regulations
• Cannot meet data security or payroll compliance requirements (HMRC/RTI, PAYE, NIC, pensions auto-enrolment, GDPR, etc.)

Outsourcing your payroll eliminates the cost and manual errors of in-house payroll, helping your business to avoid penalties over tax compliance. By outsourcing, you benefit from the additional skills of specialists in payroll, while avoiding the extra costs of hiring an in-house team. Quite simply, outsourcing payroll saves your company a lot of time, money and worry.

How much does it cost to outsource payroll?

Payroll outsourcing costs generally depend on payroll frequency, total number of employees, and the specific services that are being outsourced. In most cases, there is a per-payroll processing fee and an annual base fee. 

Why outsource your payroll to ADP?

Employers who outsource payroll to ADP get comprehensive support and added peace of mind that payroll is handled accurately and securely. ADP provides fast, reliable payroll processing, calculates and pays the right tax deductions, offers mobile-friendly self-service tools and helps monitor compliance across the UK and internationally.

Discover ADP’s payroll outsourcing services