Benefits of outsourcing payroll vs. payroll software
The essential element of UK payroll administration is accurately calculating the employee’s income tax and national insurance contributions deducted for each pay period, generating pay stubs for each employee and reporting payroll deductions to the tax office.
Running a payroll system is natural for medium to large businesses that can employ specialized payroll personnel to perform these functions. Many midsize companies may still choose to outsource the payroll function leaving many of the technical issues that can arise to a specialized payroll service.
Small businesses may choose to outsource the payroll function because they are unfamiliar with the payroll system, although HMRC runs seminars to help employers. The payroll system not only calculates national insurance and tax deductions, but also has to deal with changes in the tax code, new employees and changes in existing employees, plus taxable benefits and allowances, such as legal sick pay and maternity leave, state pension plan outsourcing, and student loans.
The main benefit of manually producing employee payroll is the reduced cost, although the time the owner spends on the payroll function may be better spent running the business. Cost may not be the cheapest option if an employee is required to produce payroll. Purchasing payroll software can save significant time and cost for the small business that chooses to set up and monitor its own payroll function. Although time is more important as the cost of payroll production is usually not a big issue.
Outsourcing payroll adds a small additional cost to running the business, but would typically generate worthwhile benefits by reducing time spent on the function and reducing the administrative burden of pay.
Main benefits of outsourcing the payroll function.
1. Frees up time calculating payroll deductions and handling different and sometimes complex employee circumstances.
2. Use a professional outsourcing service to advise on potential payroll problems and difficulties.
3. The cost of outsourcing payroll should be weighed against the cost of hiring specialized internal payroll staff.
4. Payroll services use payroll software and are more likely to produce accurate national insurance and tax deductions and pay records, reducing the possibility of problems with tax authorities.
5. Payroll administration, such as preparation of tax deduction schedules, treatment of incumbents and departers, employee year-end certificates, and employer annual statements, are typically automated as part of the payroll service.
6. The outsourced service company should also be responsible for producing employee payslips, advising on taxes and deductions, and in larger companies, should also provide payroll analysis for accounting purposes.
Alternatives to outsourcing payroll functions.
Finding a suitable outsourced payroll service is not difficult. Local phone directories or internet search would bring up many potential payroll service providers.
Many bookkeeping firms offer payroll services to their clients and while prices may struggle to be competitive, the price is always negotiable. There are advantages to using the business accountant for payroll as the accountant already knows a substantial cost area for most businesses as they prepare the numbers.
Choice of payroll software.
The main alternative to outsourcing payroll is for the company to purchase and use payroll software.
Larger companies require payroll software that has incorporated all possible payment scenarios and is also capable of handling large numbers of employees. Large comprehensive packages can be complex to operate and require specialized wage staff.
Small businesses can choose simpler, less complex payroll software packages that meet basic business needs. It is important that the payroll handler within the wages function understands the essentials of payroll and the legal requirements for payroll administration.
The advantages of choosing a payroll software are basically the cost, it should save the company money against outsourcing payroll, it should maintain control over the role and responsibilities and ideally it should take no more time than providing employee details and gross wages to the payroll service.
If the company chooses to adopt a payroll software package, the complexity of the package must be considered and also the attributes and capabilities of the chosen software to produce all payroll requirements in relation to wage and salary deductions, pay administration, and employee payroll.