How much does it cost to outsource payroll?

If you’re thinking about outsourcing your payroll, you’re probably wondering how much it costs. An outsourced or ‘managed’ service from a professional payroll provider must be costly, right? Let’s find out!

Keep reading to find out how much it costs to outsource payroll. Plus, we reveal the hidden costs associated with running your payroll in-house (and getting it wrong – eek!) We also explore ‘free’ options for businesses who are operating their payroll operations on a shoestring.

What’s an example of a payroll fee?

PEPM: explained

Generally, payroll providers charge for their outsourced payroll service, i.e. the payroll processing element, on a per-employee-per-month basis. This is fondly referred to as ‘PEPM’ (pronounced ‘peppem‘) in the payroll industry.

That’s a nice bit of jargon you can drop in when you’re chatting to payroll providers about their cost of service: “so what peppem we talkin’ here pal?” Nice.

An example of a payroll fee might be £6 per employee, per month. So, if you have 50 employees, it will cost you £300 per month for a third-party payroll provider to run your payroll for you.

Note the more employees you have, the lower that PEPM will be. Smaller businesses with less employees will generally pay a slightly higher PEPM.

Weekly payrolls

If you pay your employees weekly, you’ll be charged per-employee-per-week. Obviously this will cost you more because the payroll provider is doing four to five times the amount of work.

Other pricing structures

Some payroll providers charge a fixed monthly rate for their services. This is generally only suitable for smaller businesses that have a fairly steady headcount because it’s not a very flexible way to run your payroll. Say you want to process bonuses, or commission, or you often have new starters – this won’t fly on a fixed monthly rate.

How much does it cost to outsource payroll?

When setting up with a payroll provider, it’s not just the payroll processing fee you need to consider. There are a number of other costs to think about when choosing to outsource your payroll.

Setup costs

This will also be structured on a ‘per employee’ basis. So, if you have 50 employees and a payroll provider is charging let’s say £10 per employee as their setup fee, you’ll be looking at a £500 setup fee.

Some payroll providers may wave that initial setup fee as part of promotional deals, but more often than not it’s a cost you’ll incur.

Ultimately, it’s going to take your chosen payroll provider time and resources to set your company up on their systems (uploading the people data, building in your requirements, testing and troubleshooting etc.) and doing a parallel run before your first payroll to make sure everything is hunky dory.

Payslip printing

These days, many companies use an online Employee Self-Service tool where their staff can log in and access online (‘digital’) payslips. At Moorepay, we have a super cool Employee Mobile App for this (just in case you’re interested…)

But if you’re still keen on sending our hard copies of your employees’ payslips each month, this is likely to incur a cost. Our advice would be consider switching to a digital service – it will save you money and save a few trees in the process (win win!)

Auto-Enrolment

This can be another cost associated with your payroll processing that may or may not be lumped in with the payroll processing, or ‘PEPM’ fee.

An additional auto-enrolment element could cost a few more pound per employee. Some providers offer a ‘fully managed’ AE service that comes with bells and whistles – this will cost a bit more but you may not need this level of service.

Add-ons /bolt-ons

Let’s say you want to integrate with HR software as well (which companies are increasingly looking to do because it saves time and money – find out more on payroll & HR integration benefits). This is an additional offering that will incur an extra cost.

Likewise, you may wish to bolt on timesheets and expenses or opt for Faster Payments. Again, this is going to cost you a wee bit more.

Other costs

Payroll providers may also charge some initial costs at the point of implementation, for things like parallel payroll runs and system training. There could also be costs associated with other areas of payroll, such as web archiving and creating P11Ds.

Hidden costs when keeping payroll in-house

How many mistakes are being made in your payroll run? Think incorrect or late salary payments. And dodgy calculations for sick pay, maternity pay, shared parental pay, (the list goes on…) And what about messy back and forth over applying the latest legislation like the IR35 rules?

This stuff takes up a lot of someone’s time and costs money (i.e. the direct cost of someone’s salary payment). But it’s also the indirect costs you need to think about – like the impact on employee experience when you get someone’s pay wrong. Did you know 1 in 5 employees have quit their job due to a bad payroll experience? Think how much it costs to replace people – that’s a whopper expense!

Plus, we don’t need to point out here the risk to you business of getting payroll wrong. HMRC charge a pretty penny for incorrect payroll payments, as well as penalties for failing to deposit PAYE and NI – eesh!

‘Free’ options on the market

HMRC has tested and recognised a number of free payroll software options. Unfortunately, these are only suitable for businesses with less than 10 employees. So, if you have more staff than this (or plan to) these won’t be for you.

Check them out here: Find payroll software: Free software – GOV.UK (www.gov.uk)

Of course, these options are for running payroll in-house, so you’ll need someone in your business who has an understanding of payroll legislation.

If you’re looking for a ‘free’ outsourced payroll service, sadly, that doesn’t exist. Why? Because it costs money to employee a team of experts to process payroll and this cost needs to be passed on to the customer (that’s if if they’re going have a remotely viable business model!)

One last thing…

Outsourcing your payroll may sound expensive if you’ve not done it before. But the risk of keeping it in-house and getting it wrong, and experiencing some of the hidden costs listed above will, more often than not, way out-weigh the price tag of an outsourced payroll provider.

And we know what you’re thinking: “you would say that, you provide outsourced payroll services!” Well, yes, yes we do. But we also provide payroll software to in-house payroll teams, so it’s really no skin off our nose what you choose to do. We just want you and your employees to be happy, with everyone getting paid on time, every time (super cheesy, but it’s just how we feel).

So, whether you decide to outsource your payroll or keep it in-house, be sure to choose the right service or the best software to suit your needs.