Payroll Outsourcing vs In-House UK: Costs Compared

Outsourcing payroll costs UK businesses £4-£12 per employee per month, while running payroll in-house requires either software (£90-£480/year) or a dedicated payroll administrator (£24,000-£28,000 salary). For most businesses under 50 employees, outsourcing is cheaper, faster, and transfers compliance risk to the provider.

This guide compares the true costs and trade-offs of outsourced versus in-house payroll in the UK, including hidden expenses, compliance considerations, and a clear framework for deciding which approach suits your business. All figures verified for the 2025/26 tax year.

Outsourced vs In-House Payroll: Costs Compared

Outsourcing payroll costs £4-£12 per employee per month. Running it in-house costs £90-£480/year for software plus staff time – cheaper only above 50 employees.

The cost comparison between outsourced and in-house payroll depends on your employee count and how you value your time. Here is how the numbers break down for a typical UK business:

In-house software cost assumes the business owner or an existing employee processes payroll. “In-house with admin” means hiring a dedicated payroll administrator.

At first glance, buying software and doing it yourself looks cheapest. But these figures do not account for your time. If a business owner earning £50,000/year spends 4 hours per month on payroll, that time costs roughly £1,200/year in opportunity cost. Factor that in, and outsourcing at £960/year for 10 employees is comparable – with the added benefit of transferring compliance risk.

What Does Outsourced Payroll Include?

Outsourced payroll providers handle RTI submissions, payslip distribution, auto-enrolment, year-end reporting, and HMRC queries – typically for £4-£12 per employee per month.

A standard outsourced payroll service in the UK covers:

• Monthly payroll processing: Tax, NIC, and net pay calculations for all employees
• HMRC RTI submissions: Full Payment Submissions (FPS) and Employer Payment Summaries (EPS)
• Payslip generation and distribution: Email, portal, or printed payslips
• Auto-enrolment management: Employee assessments, pension provider submissions, opt-in/opt-out
• Year-end reporting: P60s, P11Ds, and annual HMRC submissions
• Starter and leaver processing: P45s, new employee setup
• HMRC queries: Handling tax code changes and HMRC correspondence

Premium services (£8-£12/employee/month) add BACS payment processing (the provider pays your employees directly), dedicated account management, HR advisory, and holiday/absence tracking.

Budget services (£4-£6/employee/month) cover the essentials but may charge extra for year-end processing, mid-month payroll changes, and additional pay runs. Always check what is included in the base price before signing. For provider recommendations, see our best outsourced payroll companies guide, and for a full breakdown of UK payroll spend at each business size, our payroll costs guide.

What Does In-House Payroll Require?

In-house payroll requires payroll software (£90-£480/year), HMRC PAYE registration, and 2-6 hours per month of processing time depending on employee count.

Running payroll in-house means either the business owner, an office manager, or a dedicated payroll administrator processes payroll each pay period. You need:

Payroll software: Moneysoft costs £90/year (desktop, Windows), Sage Payroll from £20/month (cloud), or Xero Payroll at £1.50/employee/month (cloud add-on). Free options exist – see our free payroll software guide, or our roundup of the cheapest UK payroll software if you need a low-cost paid tool.

Time: A 10-employee payroll takes 2-3 hours per month (data entry, checking, running RTI, distributing payslips). A 50-employee payroll takes 6-10 hours. Year-end adds 4-8 hours. New starters, leavers, and mid-month changes add unplanned time throughout the year.

Knowledge: You need to understand PAYE tax codes, NIC calculations, statutory payments (SSP, SMP, SPP, ShPP), auto-enrolment thresholds, and year-end reporting requirements. HMRC updates these annually – for 2025/26, the employer NIC rate is 15% (up from 13.8%), the secondary threshold dropped to £5,000, and the Employment Allowance increased to £10,500.

Compliance responsibility: If you submit RTI late, HMRC charges penalties starting at £100/month for 1-9 employees, scaling to £400/month for 250+ employees. Incorrect submissions can trigger enquiries, penalties, and interest. With outsourced payroll, the provider carries professional indemnity insurance for errors – with in-house payroll, the liability is yours.

When to Outsource Payroll

Outsource payroll if you have complex pay structures, limited payroll expertise, compliance concerns, or value your time at more than £15/hour.

Outsourcing makes financial and operational sense in these situations:

You lack payroll expertise. Payroll errors are costly – late RTI attracts HMRC penalties, incorrect NIC calculations create liabilities, and auto-enrolment mistakes risk fines from The Pensions Regulator. If nobody in your business has payroll experience, the risk of DIY errors often exceeds the cost of outsourcing.

You have complex pay structures. Multiple pay rates, overtime, commission, bonuses, salary sacrifice schemes, and CIS all add complexity that increases error risk. Outsourced providers handle these routinely.

Your time is worth more than £15/hour. If a business owner earning £50,000+ spends 4 hours monthly on payroll, the opportunity cost (£25+/hour) exceeds the £80/month outsourcing cost for 10 employees. That time could generate more revenue in the business.

You want compliance peace of mind. Outsourced payroll providers carry professional indemnity insurance. If they make an error, their insurance covers the cost. In-house errors are your financial responsibility.

When to Keep Payroll In-House

Keep payroll in-house if you have under 10 employees, simple pay structures, payroll knowledge, and want to maintain direct control over sensitive pay data.

In-house payroll works well when:

You have a small, simple payroll. Under 10 employees on fixed monthly salaries with no overtime, commission, or complex benefits. Modern software like Moneysoft or Sage handles this in under 2 hours per month.

You or someone in the team understands payroll. If you have an office manager or bookkeeper who is comfortable with PAYE, NIC, and auto-enrolment, the knowledge barrier disappears. Many accountants also run payroll for their clients as part of their service.

Data sensitivity matters. Some businesses prefer to keep salary data entirely internal rather than sharing it with a third party. In-house payroll means no external access to employee pay information.

Cost is the primary concern. At £90/year for Moneysoft, in-house payroll is genuinely cheap if you do not factor in time. For a sole trader paying 3 employees, the annual software cost is less than one month of outsourcing.

Hidden Costs of Each Approach

In-house payroll has hidden costs in time, training, and error liability. Outsourced payroll hides costs in setup fees, year-end charges, and per-payslip extras.

Hidden Costs of In-House Payroll

• Annual software updates: Some desktop software charges separately for tax year updates (Moneysoft includes them free; some others charge £50-£100)
• Training time: HMRC rules change every April. Someone in the business needs to understand the changes – this costs time and potentially formal CPD courses
• Error correction: A single incorrect RTI submission can take 2-4 hours to resolve with HMRC, plus potential penalties
• Pension administration: Auto-enrolment re-enrolment happens every 3 years and requires careful planning and employee communication
• Year-end processing: P60 production, P11D filing, and annual HMRC returns add 4-8 hours once per year

Hidden Costs of Outsourced Payroll

• Setup fees: Some providers charge £100-£500 for initial onboarding and data migration
• Year-end charges: P60 production and annual returns may be charged separately (£50-£200)
• Per-payslip fees: Some providers charge per payslip rather than per employee – if you run weekly payroll, that is 4x the cost
• Ad-hoc changes: Mid-month pay adjustments, additional pay runs, and new starter processing may incur extra charges (£5-£25 each)
• Notice period: Most contracts require 1-3 months’ notice to cancel – switching costs time and money

• Before choosing either approach — calculate the TOTAL annual cost: software + time + training + error risk for in-house, or base fee + setup + year-end + ad-hoc charges for outsourced

Outsourcing vs In-House: Feature Comparison

Outsourced payroll includes compliance expertise and insurance by default. In-house payroll offers more control and lower per-employee cost but requires your own expertise.

The Hybrid Approach: Software + Accountant

Many UK businesses run payroll software themselves but have their accountant review submissions – combining low cost with professional oversight for £150-£300/year extra.

A third option exists between full outsourcing and complete DIY: run payroll software yourself but have your accountant review and sign off each payroll run. This hybrid approach costs the software fee (£90-£240/year) plus your accountant’s time (typically £150-£300/year for monthly review).

This works well for businesses with 10-30 employees. You maintain control and keep costs low, while your accountant catches errors before they reach HMRC. Many accountants offer payroll review as an add-on to their existing bookkeeping service.

For businesses already using Xero for accounting, adding Xero Payroll (£1.50/employee/month) keeps everything in one platform that your accountant can access directly. This is often the most practical hybrid setup for small businesses. If your accountant runs payroll for several clients, our payroll software for accountants guide compares the platforms practices typically use.

Our Verdict

Outsource payroll if you have 10+ employees or complex pay structures. Keep it in-house if you have under 10 staff on simple monthly salaries.

For most UK businesses with 10-50 employees, outsourcing payroll is the smarter choice. The cost difference between outsourcing (£80-£120/month for 10 employees) and in-house software (£20/month) is small compared to the time saved and compliance risk transferred. You are paying for expertise, insurance, and peace of mind.

For micro businesses under 10 employees on simple monthly pay, in-house payroll with Moneysoft (£90/year) or free software like Collegia FreePayroll is cost-effective and manageable. The payroll is straightforward enough that the risk of errors is low.

Whichever approach you choose, get quotes from multiple providers before deciding. Our best outsourced payroll companies guide compares the top UK providers, our best payroll software guide covers the leading software options, and our combined HR and payroll software roundup is the place to start if you want both functions in one platform.

Clara Wenslow

Finance & Business Services Editor

Clara analyses SME finance and procurement markets, covering business loans, invoice finance, payroll, and related B2B services. She ensures each comparison and guide is transparent and data-driven.

Reviewed by

Sarah Mitchell

B2B Commerce & Finance Reviewer