Robert Young’s article in Pay & Benefits Magazine, published November 2016.
Should you Outsource Payroll and Employee Benefits Support?
Every employer needs payroll and many also decide to provide employee benefits. This means deciding whether to undertake this work internally, or utilising outside specialists.
For any business ensuring that employees are paid on time, and correctly, is vital. Staff morale will soon suffer it this does not happen. If the business is to avoid fines it is important that information passed to HMRC is on time and accurate. With the introduction of Real Time Information (RTI) a few years ago, this can only be achieved electronically. HMRC has provided some basic tools but as the HMRC tool does not produce payslips this is of limited use in practice. There are many payroll systems on the market, some of which can be obtained at no cost, or low cost for very small businesses. Unfortunately payroll has its own language and whilst some aspects are straightforward, others can cause problems.
Why do it yourself?
For a small business owner who is prepared to invest some time and energy in investigating the market, choosing some appropriate software, learning how to use it, and who operates a simple pay structure, they may well decide that they can undertake this role themselves or add this to the role of their bookkeeper.
As the business and the size of the payroll grows, a payroll specialist may be employed, initially as part of the accounting team and eventually as a separate unit itself. The accuracy of payroll processing relies on the provision of accurate data, and as the business will need to produce this data, it may seem simpler to keep everything in house. The data can be reviewed, checked and processed without the need to consider how it can be exported safely and securely. Keeping everything in house may appear to provide greater flexibility to make adjustments more easily, respond to changes more quickly and keep everything within a small trusted team. You may prefer this feeling of having greater control of a task that is vital to keep staff happy and motivated.
For some businesses, however, there is an issue in where this private data can be held securely and confidentially. They may operate from a small office or indeed no office at all. It may therefore be better for this data to be held securely at another place.
The amount of time involved should not be underestimated, particularly if payroll is run weekly with staff working variable hours.
As we move closer to the deadline for smaller businesses to deal with pensions Automatic Enrolment, this will add further complications and processes to the payroll function.
For a large business the outsourcing issue is different. Although they have the ability to hire the appropriate resources, there are times when they are under pressure to reduce headcount or fixed costs so may not wish to directly employ the resources necessary or fund the additional IT infrastructure that may be required, particularly when making payments to thousands of employees weekly.
A specialist outsourcer can bring a number of benefits and the real cost may be less than it first appears. As a business owner, you will have started your business because you have a passion for it, not due to a great desire to understand the world of payroll. If you devote the time you would spend dealing with payroll matters on your own business instead, then not only are you likely to enjoy this more but you will be concentrating on growing your own business with the rewards this will bring, leaving the specialist payroll bureau to deal with this essential administration, as this is their passion. If you employ staff to undertake the payroll function, they are likely to be salaried and therefore a further fixed cost overhead on the business.
An outsourcer will bring to you greater resources to deal with issues. If you only have one person who deals with payroll what happens if they are off sick at a key point in the pay cycle? A specialist outsourcer will provide in depth technical knowledge and have the experience and flexibility of a large team, yet you will only pay for the support you need.
In the world of payroll, like everything else, nothing stays still for long so there will be legislative changes to keep up with. A good software provider, if they have a good support function, should ensure that you are kept up to date on these issues but an outsourcer will alert to you to, and guide you through any changes, identifying the key issues that may impact your business. There are issues such as sick pay and maternity pay to deal with and the levels of these and the rules surrounding them do change from time to time.
It will not have escaped your notice that the UK has recently voted to leave the European Economic Community (EEC). No one is currently sure of the actual implications of Brexit, but this could lead to more changes. As each European country retained their own tax systems, it is to be hoped that there will not be too many implications for payroll processing. However an outsourcer will keep a keen eye on developments and be ready to react to any changes.
Many smaller businesses provide few employee benefits in order to keep the payroll processing as simple as possible. Others take the view that they pay their staff and it is up to them decide how to spend this money and whether to purchase benefits such as life cover or not. However, in a competitive world, it is often necessary for an employer to offer some benefits in order to attract and retain key employees needed to develop and grow your business. Some benefits are straightforward to provide but others are complex and again subject to their own language and legislative requirements.
If you are spending money on employee benefits, it is important that the benefits are obtained at the best possible price, constructed in the most appropriate way, and appropriate to the needs of your workforce.
While many very large companies employ benefit and reward managers, smaller businesses typically rely on either the Finance Director, Human Resources Director or business owner to deal with this.
Why do it yourself?
You would need to pay an outsourcer whereas an internet search and a few telephone calls will obtain at least a few providers of any benefit you may wish to offer. A little time in reviewing their offerings and a decision can be made and implemented. Indeed at the simplest level the provision of tea and coffee or in this healthy era, fresh fruit, may simply require for a small business the occasional trip to the supermarket. There are a number of other benefits that are relatively simple for a business to find directly such as childcare vouchers, or bike to work schemes. A good provider should also provide marketing materials and explain how the benefit impacts on payroll.
Other typical employee benefits such as pension, life cover, income protection, and private medical cover or health cash plans are not as straightforward.
The time that it takes to undertake the required research should not be underestimated and may not result in finding the best provider.
If you have a small HR team, then their focus should be on the people issues, ensuring that you maintain a happy and motivated workforce rather than being involved in the detail of seeking the best providers for different benefits, particularly where they may have no experience in doing so.
An outsourced employee benefit specialist will give a smaller business access to the same skills that a large company may employ directly, with the ability to work with the appropriate in house personnel to formulate the appropriate benefit strategy for your business and then seek the best providers for each aspect.
At one level money purchase pensions are straightforward, but pensions has a language all of its own with much associated legislation and regulation. In addition the State provision of pension has changed recently and is likely to change again. It is not always easy to ascertain the full costs of an arrangement. Although the difference between an annual management charge of 0.4% and 0.6% does not sound much, your younger members of staff will be investing for 30 to 40 years and over this amount of time the impact of this can be significant. There is also the issue of where the funds should be invested which can have a significant impact on the final outcome.
Most large employers provide life cover but smaller employers have tended not to. However this is a popular benefit with staff and even for small groups can be purchased on terms that are far less than it would cost the employees direct. The key is knowing which insurers are competitive for smaller groups, which your outsourcer will know. Smaller business may decide not to offer benefits because they are too costly whereas a specialist could demonstrate that this is not the case and therefore enable a wider employee benefit package to be offered, perhaps helping attract staff to the business and retain them.
As we move into the post Brexit world, businesses will be faced with a number of changes particularly if they are trading internationally and new trading agreements are negotiated. The provision of State and private benefits has never been unified across the various countries within the EEC. As a result there are unlikely to be many changes directly as a result of Brexit. Of greater issue in the UK is the Treasury’s focus on salary sacrifice arrangement and the potential for this to be withdrawn. The provision of childcare is already changing in 2017 with the introduction of a new Government Scheme, but other benefits such as bike to work, provision of mobile phones, tablets and computers and optional employee pension contributions are tax efficient at least partially due to being provided on a salary sacrifice basis. This was considered in the last budget and no action was taken but a further review may take place.
In summary although there is a direct cost if a specialist outsourcer is used, and to some extent at least a perceived relinquishment of control, this can be offset by internal resources being more profitably directed to your own business, and savings being made due to the experience and knowledge of the specialist and the alternative proposals they can provide.