Moving from an Outsourced Payroll to Inhouse
Transitioning from an outsourced payroll function to an in-house team can feel like climbing a mountain. While the promise of greater control and long-term cost savings is appealing, the journey is fraught with challenges. This is especially true when it comes to implementing new software, upskilling staff, and maintaining compliance. Here’s what businesses must prepare for to avoid costly missteps.
Outsourced to Inhouse
Whatever the decision, make sure your business is prepared for the next steps.
1. The Software Learning Curve: A Risky Investment
Switching to in-house payroll means adopting new software, which can disrupt operations if not managed carefully.
Pitfalls:
Integration Issues: Incompatibility with existing HR or accounting systems may lead to data silos or manual workarounds, increasing errors.
Training Gaps: Without proper training, staff may misuse the software, leading to incorrect pay calculations or missed deadlines.
Hidden Costs: Licensing fees, IT support, and updates can inflate budgets beyond initial projections.
HMRC Compliance Risk:
Real Time Information (RTI) Failures: Incorrect submissions due to software errors can trigger HMRC penalties—up to £400 per month for persistent late filings.
Pension Auto-Enrolment: Missed contributions caused by system misconfiguration may result in fines of £50–£10,000 per day (depending on employer size).
2. Upskilling the Team: Time and Expertise Gaps
Outsourced providers handle legislative updates, but an in-house team must stay ahead of changes. This can be a monumental task for newcomers and is hard to predict
Pitfalls:
Knowledge Shortfalls: Payroll staff may lack expertise in areas like off-payroll working (IR35) or holiday pay calculations, leading to non-compliance.
Single Point of Failure: Relying on one trained employee creates risk; absences or resignations can derail payroll entirely.
HMRC Compliance Risk:
Tax Code Errors: Misapplied tax codes (e.g., incorrect emergency tax) may require costly corrections and employee reimbursements.
Statutory Pay Mistakes: Underpaying sick or maternity leave can lead to tribunal claims and reputational damage.
3. Compliance: The Constant Requirement
HMRC updates payroll rules frequently. Without a bureau’s dedicated resources, in-house teams must monitor changes independently.
Critical Legislation Often Overlooked:
National Minimum Wage (NMW): Misclassifying workers or incorrect calculations can result in fines of 200% of unpaid wages and public naming.
Apprenticeship Levy: Errors in reporting or payments may lead to HMRC clawbacks.
Gender Pay Gap Reporting: Missed deadlines or inaccurate data can result in enforcement action and negative publicity.
Cost of Non-Compliance:
A single HMRC investigation can cost thousands in penalties, staff time, and legal fees. It is always best to be ahead of new legislation by conducting regular explorations into critical business functions like payroll. We recommend looking at quarterly reviews as due process.
4. Mitigating the Risks: Best Practices
To navigate the transition successfully:
Invest in Robust Software: Choose a system with HMRC-recognised compliance features (e.g., automatic RTI submissions).
Prioritise Training: Enrol staff in CIPP-accredited courses and schedule regular legislative updates.
Build Redundancy: Cross-train multiple team members to avoid reliance on one person.
Audit Frequently: Conduct quarterly payroll reviews to catch errors before HMRC does.
Conclusion: Is the Struggle Worth It?
Bringing payroll in-house offers control but demands significant investment in technology, training, and compliance vigilance. For many businesses, the hidden costs and risks outweigh the benefits—at least in the short term. However, the security of controlling internal data, and the ability of making last minute corrections, can give greater freedoms to businesses looking to scale up in the long run. Whatever your decision, make sure you are prepared for the next steps.
Key Takeaway: Before making the switch, conduct a thorough cost-benefit analysis that includes potential penalties, software overheads, and the true cost of staff upskilling. Otherwise, the mountain might prove too steep to climb.
Need Help? Your payroll team might need a bit of assistance getting back on track after a transition. Our payroll assessments can discover areas of vulnerability in your processes and provide course correction when needed. Get in touch today.
Sources: HMRC Penalty Guidelines, CIPP Compliance Updates