Money. Money. Money. All employees want to be paid on time and all employers want to do this as efficiently and effectively as possible. So it unsurprising that payroll was one of the first areas of business to be the target of in-house software and outsourced solutions. The process requires lots of calculations and absolute accuracy, and ensuring that exactly the right amounts are paid and deducted at exactly the right time is a responsibility that no employer can entirely abdicate, even if they want to, because their role as unpaid tax collector, benefit payer and debt collector, is becoming increasingly complex, costly and time-consuming, says Lesley Meall, FSN contributing editor.
‘Attention and time has to be diverted from other crucial areas of the business to manage the growing load of obligations,’ comments David Frost, director general of the British Chambers of Commerce, and the payroll administration burden is heaviest for those who can least afford it. The cost can range from as little as £1 per employee, per pay run, to more than £100 per employee per year (depending on who is counting), and the admin burden is always proportionally higher for smaller businesses, because as Dr Colin Lawson, from the University of Bath observes: ‘The costs fall as the size of the payroll increases.’
Fortunately, for small and medium businesses that want to lighten the load, there is an increasingly broad range of alternatives. If you want to automate or delegate all or part of the payroll process, the options now include: accounting and business systems with payroll functionality standalone payroll packages, payroll tools from HM Revenue & Customs, and spreadsheets (which can all be used on your own on-premise software), plus on-demand Software as a Service offerings, traditional payroll bureaux, and various other types of managed service and outsourcing, which can all be handled either online and/or at the remote locations of service providers.
First steps
But before you even think about assessing which options might best meet your needs, you must be clear on what these are (whichever approach, or mix of approaches, you eventually choose). Many payroll processing needs are determined by statute, and you can reasonably expect all payroll software and services to reflect the latest regulatory changes and help you to comply with most of the payment and reporting needs of HM Revenue and Customs – but not all. It’s worth noting that built in support for the Construction Industry Scheme and P11D compliance are both unusual. Even so, it is a good idea to choose a product or service that complies with the HMRC standards on payroll and pensions.
These considerations such as these are just the tip of the iceberg though, and you also need to consider the particular needs of your organisation. Don’t be surprised to find that even a very small organisation has requirements that are considered ‘special’ by the providers of payroll software and services. Although there are plenty of ‘general’ payroll systems and managed service solutions that will meet the requirements of a wide range of organisations, not all of them will meet the needs of all organisations. The way an organisation is structured, the way it operates, and its sector-specific needs can all make finding a system or service a little more difficult than it might otherwise be.
Not all systems support multiple departments, divisions, locations, or pay groups, or multi-component pay (such as bonuses and commissions), or payment frequencies (such as two-weekly), or handle more than one currency. Some features, such as job costing, may be included only in certain versions of a system, or available only as add-ons, or through links with other specialist providers of systems or services. While Public sector bodies, recruitment agencies, providers of financial services, and organisations in the not-for-profit and charity sectors will all find their options relatively limited when it comes to software packages, and may find life easier with a bureau or managed service provider (on which more, later).
Before you can consider any of the available options, you also need to be clear on the functionality you require from your payroll.
- Ad hoc deductions (such as loans and charitable donations);
- Ad hoc payments to HMRC and employees (such as bonuses and commissions);
- Ad hoc reporting;
- Automatic overtime calculation;
- Backup and restore support for data;
- Composite year-end routines;
- Data import and interfaces/integration with other systems;
- Earning and deduction codes;
- Electronic banking;
- Electronic filing and/or printing of statutory in-year forms (such as various parts of forms P45 and P46) and year-end forms (P14 and P35);
- Employee attendance recording;
- Multiple bank accounts, users and currencies;
- Support for statutory payments such as adoption pay, attachments of earnings other Court Orders, maternity pay and sick pay, plus child support payments, company car benefits calculation, deductions, cost centres, IR35, labour and job costing, retrospective payments, and student loans management.
Some or all of these, and more, may need to be on your list. Preparation is the key to many endeavours and the selection of payroll software and services is no exception.
The devil and the deep blue sea
Just reading about all of the issues you need to consider can be enough to put you off the idea of getting any more involved than is absolutely unavoidable; in which case, a bureaux or managed service may offer the best solution to your payroll processing needs (on which more, later). But for many organisations, clarifying exactly what they need from a payroll package or service can be the most complicated part of the process. This is not to say that payroll isn’t complex; it is. But all of the available options hide some of the complexity from the end user – if to varying degrees.
Take payroll applications. At one end of the scale, you will find systems aimed at businesses with no payroll expertise. They are designed to be easy to set up and use, without any training or payroll knowledge, and often offer contextual help to lead you through processes for the first time (or if you forget what to do). At the other end you will find systems that are so complex that you need to go on a training course to learn how to use them, and back this up with a working knowledge of payroll administration. Most systems fall somewhere between these two extremes, but there is a lot of variation in areas such as ease of use, built-in intelligence, flexibility, and support.
So whether you are considering an in-house payroll package (that will ultimately need to be installed, maintained and upgraded, on your computer equipment) or an online on-demand offering (that lives on the servers of third party suppliers and can be accessed using the internet), be sure to select something that matches the capabilities of the people who will be using and it, and ideally, give them the opportunity to try the system before you decide. Choosing between these two approaches raises almost as many issues as choosing between an in-house approach or a third party managed service, so take a look at the FSN article on choosing an SME bookkeeping and accounting system, as many of the issues you need to consider are similar.
The availability of on-demand (Software as a Service) payroll offerings creates something of a grey area for many; it can be tricky to differentiate between ‘traditional’ bureau offerings (from accountancy firms and other specialists), SaaS offerings (provided by software developers), and various other types of managed service – particularly as access to much of what they offer takes place over the internet using a computer (or some other device). While those involved on the supply side may be perfectly clear on what differentiates these various options, the associated terms of reference (and largely artificial delineations) can be baffling for potential users. (Reading the FSN features on the options for streamlining and simplifying HR, and outsourcing HR, can provide valuable insights.)
To minimise the potential for confusion, focus on what you want to achieve by using an externally provided payroll service: it could be as limited as providing payslips, it could check the payroll data and run the calculations, or go as far as providing a totally outsourced payroll function. But be aware, that unless the latter is the case (and it’s costly, so it rarely is), you will not be able to entirely escape some involvement in the payroll process. Somebody within your organisation will need to collect and collate some (or all) of the employee-related information required, before it can be sent to the third party organisations that will be running the payroll, and providing the associated services.
In some scenarios this may mean the employer has to calculate overtime, work out National Insurance Contributions, and undertake various other payroll-related tasks – in advance of the date on which a payroll run or a statutory filing is scheduled to take place. Everything you decide to outsource, or to not outsource, could well have a cost implication. Activities such as creating the BACS payment to employees (and verifying that this has been processed correctly) or handling joiners and leavers (and producing their P45s), may be included in a fixed monthly fee; then again, they may not, and when you compare various suppliers’ costs, you may find significant variations.
So, even if you decide to use the services of a third party provider – which can initially seem like the simplest way to deal with the complexities of payroll – you still need to make some informed decisions. You still need to be clear about what you will and will not require from that service, and what you are and are not prepared to pay for. In practice, most small and medium organisations end up doing some of the work inside the company and getting some of it done outside, depending on how little, or how much, they want to be involved in the payroll administration process – and how much they can afford to abdicate. As with many other business decisions, in the final analysis, it all comes down to money, money money.
