While many small business owners complete their business payroll at the end of each month, it’s not uncommon for them to have initially completed the work themselves as they felt it to be an easily managed function of their business, with little budget to outsource. As the business grows, however, it becomes clear that there is a point at which completing the work in-house becomes less cost effective than outsourcing.
You’ve Passed Ten Employees
A simple spread sheet may work for two or three employees with varying tax codes but as you get into the region of ten employees and above then manual checking of various items becomes a large time consuming task and actually takes more time than processing the actual payroll.
Pension Rules Keep Changing
You must apply the current contribution rate in each pay period. There are different rates for employer and employee contributions. In addition there are different qualifying earnings thresholds for relief workers and employees. You must also apply the relevant opt-out rules for relief workers and employees. It’s not a simple once a year task, errors can result in late penalties and even back payment of contributions and correction to pension scheme records for previous years.
Mistakes Are Getting Expensive
Just because you can submit your payroll online to HMRC, does not mean that all will be well. First there is the small matter of the reporting dates for each of your payrolls in any given tax year. You will have a variety of reporting dates, depending on the number of employees that you have, and these dates will vary from month to month. There is also the issue of the W1 date for those of your employees that are undergoing NICs review by HMRC (usually because HMRC disagree with the amount of NICs that you have accounted for). When these employees cease to be contracted out of the higher rate of NICs (such as when they cease to be employed by their personal service company), you will need to report this to HMRC on the payroll submission for the date that the employee’s cessation of contract date falls in. There is also the risk of late filing penalties where HMRC receive your submission late, which can be significant. For example, if you file one to four months late, the penalty is normally fixed at £100, but where you have been late previously, this can increase to up to £300. If you file between five and eight months late, the penalty is usually £200, but again, previous failures can increase this to up to £500. For submissions filed between nine and twelve months late, the penalty is £300 (or up to £1,000 if you have previously failed to file on time). If you fail to file a given submission within twelve months of the relevant date, then HMRC will charge a penalty of £1,000 (or up to £3,000 in the case of previous failures). Penalties can also increase in the event of failure to correct an error within specified timescales. Where there has been a failure to account for Deductable Class 1 employers’ liabilities for a given tax year and/or late submission of the giving effect to those liabilities for the same year, then for each month (or part month) from the relevant date up to and
Only One Person Understands It
There are plenty of small businesses run by single bookkeepers, office managers and even business owners’ spouses who do the payroll. It’s all ticking along until the person doing the payroll goes off on holiday or gets ill and then it all falls apart. No one wants to be in a position where the whole of the payroll for the month has to be done in a few days because that one person is off ill.
Statutory Payments Are Catching You Out
Most small businesses will calculate Maternity, Paternity and Sick Pay for their employees for the first year or so. After that they can become complex to calculate. All the different rules for calculating these payments are usually covered by the company’s Payroll Services provider, but an example of the complexity involved is calculating average weekly earnings for Maternity Pay correctly and applying the correct rate from the correct week. Recently having to calculate a Maternity claim for the first time would indicate that perhaps you have reached the end of your free payroll calculations.
Your Time Is Worth More Elsewhere
Estimate how many hours you currently spend to gather the timesheets for your employees, calculate the payroll, prepare and submit the online returns for HMRC. Multiply these hours by the hourly rate of your work (e.g. what you would earn if you were to do more sales calls, or work for another client). In most cases, the cost for in-house payroll will be greater than the monthly fee of your provider, even before you start to factor in the additional stress of potential errors.
Cover Is Impossible to Arrange
Nobody can forecast when you will be away from work, whether that’s a holiday or illness. Employees and HMRC expect payment and submission of online returns to reach you in time. If you’ve had a near-miss recently through absence and haven’t known how to deal with it, it’s better to deal with it now rather than wait for the worst to happen.
The Numbers Often Tip in Favour of Outsourcing
The costs of running payroll in-house must be compared to the costs of an external provider. Often, the cost of software, time spent by the payroll person updating their knowledge of changes to pay rules and the time spent fixing errors after they have been processed by the external provider can exceed the monthly fee charged by the provider. It is also important to check that any provider you consider is working to the highest standards, i.e. accredited accountancy standards, and that you have access to the widest possible range of advice on pay and employment rights and HMRC’s guidance on payroll and PAYE.
There’s no one-size-fits-all answer to this question. It’s generally best to look at two or three of the points above and work out whether most apply to you yet. If they do, then yes, it’s probably time to stop doing your business payroll already!
