Cost of outsourcing to a payroll services bureau – Understanding the prices, costs and hidden fees

Outsourcing payroll is a decision many UK companies make to free up time and resources. It allows a business to focus on core competencies while leaving the complexities of payroll to experts. However, opting for a payroll service bureau isn’t a straightforward decision when it comes to finances – and what are the costs of outsourcing payroll?


Video: Answering your common questions about payroll prices and costs

This article aims to provide an exhaustive look at the costs involved in outsourcing payroll, including fees to the service provider, HMRC, and other potentially hidden charges.

Costs to the provider

Initial setup fee

Most payroll service providers will charge an initial setup fee that can range from a couple of hundred to several thousand pounds, depending on the complexity of your payroll.

Monthly or per payroll run charges

Providers often bill either monthly or per payroll run, and these fees usually vary according to the number of employees in your organisation.

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Additional service charges

Specialised reports, year-end tax forms and any bespoke services will typically come with an additional fee. Always make sure to discuss any special requirements upfront and get an estimate for these.

Software integration fees

If you require the payroll service to integrate with other business software like HR or accounting systems, expect to incur additional costs.

Costs to HMRC

Late filing penalties

Failing to meet filing deadlines can result in penalties from HMRC. While a reliable payroll services bureau should prevent this, the ultimate responsibility lies with the employer.

Underpayment or overpayment adjustments

Errors in tax or National Insurance contributions could result in additional charges or penalties from HMRC. Again, a competent service provider will minimise this risk, but it’s crucial to understand your responsibilities.

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Hidden fees

Data correction fees

Mistakes happen, and correcting data like employment records after the payroll has run can result in additional charges.

Exit fees

Some providers charge a fee for closing your account or transferring services back in-house or to another provider.

Emergency payroll runs

If you need a payroll run outside of the regular schedule, you’ll likely incur an extra fee.

Other costs

Training and change management

Your staff may require training to understand the new payroll system or to liaise effectively with the service provider, which is an indirect cost.

Contractual limitations

Some providers may have clauses that limit your flexibility in scaling your services up or down, leading to additional costs if your needs change.

Typical costs – how much should a business budget for payroll per employee?

Determining a budget for payroll services per employee is crucial for any business contemplating the outsourcing route. While the payroll outsourcing costs can vary widely depending on the provider and the complexity of your payroll needs, here are some general guidelines.

Basic payroll processing fees

For a basic payroll service, you can expect to pay anywhere from £20 to £50 per month for up to 5 employees. This usually includes standard payroll processing and check issuance or direct deposit.

When you scale the number of employees, the cost per employee often decreases; you may pay £100 to £200 per month for up to 20 employees, for instance.

Payroll add-ons

Additional services such as administering pensions, calculating bonuses or commissions, and managing employee benefits will add to the overall cost. You might find these bundled into more comprehensive packages, or they may be offered á la carte.

Annual costs

Remember that annual tasks such as producing P60s or year-end tax forms will often come with additional charges. Budget approximately £100 to £300 per year for these, depending on the number of employees and complexity.

Frequency of payroll runs

The frequency with which you run your payroll also has a bearing on cost. Weekly payrolls will generally cost more than bi-weekly or monthly due to the increased frequency of the service provided.

Indirect costs

Don’t forget to account for indirect costs like training and possible penalty fees from HMRC, which could range from a few hundred to thousands of pounds depending on the severity and duration of the non-compliance.

Summing it up – How much does outsourced payroll cost?

As a general rule of thumb, small to medium-sized businesses should budget approximately £500 to £1,000 per employee per year for outsourced payroll services costs. This estimate includes basic processing fees, additional services, and annual tasks, but excludes any penalty fees or indirect costs like training.

By comprehending the full scope of costs involved in payroll outsourcing, you can better compare payroll services and make an informed financial decision that aligns with your business objectives.

Outsourcing costs vs doing payroll in-house using payroll software

Choosing between outsourcing payroll and managing it in-house using payroll software is a significant decision that can have far-reaching consequences for your business.

Below are some pros, cons, risks, and opportunities associated with both options to help guide your choice.

Outsourcing payroll


  • Expertise: Service providers are specialists in payroll regulations, compliance, and best practices, ensuring a high level of accuracy.
  • Time-Saving: Outsourcing allows you to focus on core business activities, freeing up valuable time.
  • Scalability: As your company grows, an outsourced service can easily adapt to your expanding payroll needs.


  • Cost: Depending on the complexity and number of employees, outsourcing can be expensive.
  • Limited Control: You entrust an external entity with sensitive financial data and have less immediate control over payroll operations.
  • Dependence on Service Provider: If the service provider makes an error or misses deadlines, it could result in penalties from HMRC or employee dissatisfaction.

Risks and opportunities

  • Risk: Hidden fees can add up if not carefully reviewed.
  • Opportunity: The availability of specialised services like benefits administration or detailed reporting can add value beyond basic payroll functions.

Doing payroll in-house using payroll software

Popular payroll software include Xero, QuickBooks and Sage.


  • Cost-Effective: For smaller companies, in-house payroll software can be more cost-effective than outsourcing.
  • Full Control: You retain complete control over your payroll data and can make real-time adjustments.
  • Customisation: Many software options offer high levels of customisation to suit your specific business needs.


  • Complexity and Training: Payroll regulations and tax laws can be complex, requiring dedicated, well-trained staff to manage effectively.
  • Time-Intensive: Although software can automate many tasks, someone still needs to input data, update records, and oversee the process, taking time away from other business activities.
  • Upfront Costs: While you might save in the long term, the initial purchase of software and training can be expensive.

Risks and opportunities

  • Risk: A lack of expertise can lead to mistakes, which could result in penalties from HMRC.
  • Opportunity: Having payroll in-house allows for seamless integration with other business functions like HR and accounting, providing a holistic view of your business operations.

Your choice between outsourcing and in-house payroll will depend on various factors including company size, budget, internal expertise, and your willingness to handle complex regulatory requirements.

Each option has its pros and cons, as well as risks and opportunities, which should be carefully considered to make an informed decision that aligns with your business needs.

Conclusion – Payroll outsourcing costs

Outsourcing payroll offers the advantage of expert handling of a complex function, but understanding the full cost picture is essential for making an informed decision.

From provider fees to penalties from HMRC, and potential hidden costs, businesses should scrutinise each aspect to avoid unpleasant surprises.

A comprehensive analysis of the various charges will not only enable a smoother transition but will also assist in optimising the benefits of outsourcing your payroll services.

For more, see our guide to cheap payroll.

FAQ about payroll outsourcing costs

How much does payroll outsourcing generally cost?

The cost varies widely depending on your number of employees, the complexity of your payroll, and the services you require. For small to medium-sized businesses, budget approximately £500 to £1,000 per employee per year.

Are there initial setup fees for payroll outsourcing?

Yes, most providers charge an initial setup fee that can range from a few hundred to several thousand pounds.

Are there monthly fees when outsourcing payroll?

Most providers charge a monthly fee, often dependent on the number of employees. This can vary from £20 to £200 per month.

What services are usually included in the basic package when outsourcing payroll?

Basic services typically include payroll calculations, check issuance or direct deposit, and tax filing.

What are some common additional services when outsourcing payroll?

Common add-ons include pension administration, benefits management, and custom reporting.

Do I have to pay extra for year-end forms when outsourcing payroll?

Yes, producing year-end forms like P60s usually incurs an additional fee.

Are there hidden fees I should be aware of when outsourcing payroll?

Hidden fees can include charges for data correction, emergency payroll runs, and exit fees.

Can I negotiate the price when outsourcing payroll?

Some providers may be open to negotiation, particularly if you have a large number of employees or require multiple services.

Is there usually a contract when outsourcing payroll, and what is the typical contract length?

Most providers require a contract, often with a term of one to two years.

Do payroll providers offer discounts for long-term contracts?

Some providers offer discounts for longer-term commitments.

Are there fees for integrating payroll with other software?

Yes, integrating with HR or accounting software usually involves additional costs.

How much does emergency payroll processing cost?

Fees for emergency payroll runs can vary but expect to pay a premium for this service.

Do payroll services providers charge for correcting errors?

Yes, correcting errors after payroll has been run usually incurs additional fees.

What happens if there are HMRC penalties when outsourcing payroll?

While a reliable provider should minimise this risk, you, as the employer, are ultimately responsible for any penalties.

Can I adjust payroll services or scale up/down without fees?

Some providers have contractual limitations that might incur fees for service adjustments.

What’s the average cost difference between in-house and outsourced payroll?

While in-house payroll software may be more cost-effective for smaller businesses, outsourcing often becomes more cost-efficient as your business grows and payroll complexity increases.

Will the payroll provider handle communication with HMRC?

Most providers will handle basic communication, but complex issues might still require your involvement.

Do I have to pay extra for multi-state or international payroll?

If your business operates across multiple jurisdictions, you will likely incur additional fees for multi-state or international payroll services.

Is training for my team included in the cost of payroll outsourcing?

Training is usually not included and will often incur an additional charge.

How can I find out about all the fees involved with outsourcing payroll?

Reading the contract thoroughly and asking for a detailed breakdown of all costs and potential fees is the best approach to understand the full financial commitment involved.

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