Payroll outsourcing: benefits, costs, and how to choose a provider

Published Friday 23 January 2026

Table of contents

• What is payroll outsourcing?
• Why outsource payroll?
• Benefits of payroll outsourcing
• How much does payroll outsourcing cost?
• Types of payroll service
• What do payroll providers do?
• How to choose a good payroll service provider
• Getting started with payroll outsourcing
• FAQs on payroll outsourcing

Key takeaways

• Evaluate your current payroll workload by calculating monthly hours spent on payroll tasks, then request quotes from multiple providers to compare costs against your time investment and potential hiring expenses.
• Choose a payroll service level that matches your specific needs, whether full-service for complete hands-off management or DIY options where you handle basic tasks while providers manage complex calculations and compliance.
• Prioritise providers that integrate directly with your existing accounting software to maintain centralised financial data and simplify bank reconciliation through automatic recording of payroll payments and tax liabilities.
• Verify that potential providers use automated systems for routine tasks and maintain robust data security measures, ensuring you pay professional fees only for expert work while protecting sensitive business and employee information.

What is payroll outsourcing?

Payroll outsourcing is when you delegate some or all payroll tasks to external specialists. These providers handle the complex, time-consuming work so you don't have to.

Payroll providers typically manage:

• Pay calculations: Working out salaries, overtime, and deductions
• Tax compliance: Filing returns and making payments to His Majesty's Revenue and Customs (HMRC)

Apply this no-blank-line pattern to all other list intros in the article.

• Employee payments: Transferring wages directly to bank accounts
• Record keeping: Maintaining accurate payroll documentation

Why outsource payroll?

Time savings:Payroll processing takes hours each month that you could spend growing your business.

Compliance protection: Legal requirements change frequently, and mistakes can result in penalties from HMRC.

Cost efficiency: Providers use automated software to process payroll faster and cheaper than doing it manually in-house.

Peace of mind: Specialists handle the complex calculations and legal requirements, reducing your stress and liability.

Benefits of payroll outsourcing

Handing over your payroll to a specialist does more than simplify a routine task. It brings several key advantages that help your business run more smoothly.

• Save time and money: You get to spend less time on administrative tasks and more time on your business. Outsourcing can also be more cost-effective than hiring an in-house payroll specialist.
• Ensure compliance: Payroll legislation and tax rules can be complex and are always changing. Experts stay up to date with these changes, reducing the risk of penalties for non-compliance.
• Reduce errors: Professional payroll providers use reliable systems to minimise the risk of mistakes in pay and tax calculations, keeping your employees happy and your records accurate.
• Access expertise: You gain access to the knowledge of payroll professionals who can handle complex situations like maternity pay, sick leave, and pensions.

How much does payroll outsourcing cost?

The cost of outsourcing payroll depends on the provider, the number of employees you have, and the level of service you choose. Most providers use a straightforward pricing model.

Common pricing structures include a fee per employee per month (PEPM) or a price per payslip. Some providers may also have a one-off setup cost to get your business onboarded to their system. It's a good idea to get quotes from a few different providers to compare costs and services.

Types of payroll service

Payroll service types fall into two main categories based on how much work you want to handle yourself.

Provider options include:

• Specialist payroll companies: Focus solely on payroll services
• Accountants and bookkeepers: Offer payroll alongside other financial services
• Business size specialists: Some target small businesses, others serve larger companies

1. Full-service payroll provider

Full-service payroll means the provider handles everything from calculations to payments to tax filing. You simply provide employee data and they manage the rest.

Benefits:

• Complete hands-off approach: No payroll tasks for you to manage
• Full compliance coverage: Provider handles all legal requirements

Requirements:

• Timely data sharing: Provide timesheets and employee changes promptly
• Higher cost: Expect to pay more for comprehensive service

2. Do-it-yourself (DIY) payroll providers

DIY payroll services handle complex calculations while you manage basic administrative tasks.

You handle:

• Time tracking: Record employee hours and attendance
• Employee records: Maintain basic staff information

Provider handles:

• Pay calculations: Work out wages, taxes, and deductions
• Software setup: Provide tools to streamline your tasks

What do payroll providers do?

Payroll services vary by provider, but most offer these core functions:

• Working out pay (including benefits and reimbursements)
• Deducting employee income tax
• Making any other deductions, such as retirement contributions
• Filing (and even paying) taxes with HMRC
• Making payments to employees
• Keeping payroll records

Payroll providers might also support you with creating a payroll numbers system to manage your employees.

How to choose a good payroll service provider

Choosing the right payroll provider requires evaluating service levels, security, and compatibility with your existing systems.

Key selection criteria:

• Service level matching: Choose services that fit your needs without paying for unnecessary features. Clarify what's included in base pricing versus add-on costs.
• Automate the easy stuff: Be sure your provider uses software to handle routine tasks so you pay professional fees only for expert work.
• Check employee details regularly: Ask what processes they have for checking and updating employee information. A change in an employee's details may affect deductions and legal requirements, so providers must be vigilant about updating them.
• Secure your data: How does your provider handle the privacy and security of your business and employee data? Ask them what safeguards are in place to ensure your data is secure.
• Work with what you have: Check out what your accounting software can do. You may already have the means to automate payroll, and you might only need help from an accountant who's familiar with the software you have.
• Work with who you know: Some accountants and bookkeepers are payroll providers too. Ask your accountant or bookkeeper if they provide payroll services.

Getting started with payroll outsourcing

Getting started with payroll outsourcing begins with evaluating your current payroll workload and identifying which tasks consume the most time.

Next steps:

1. Assess your needs: Calculate hours spent on payroll monthly
2. Compare options: Request quotes from multiple providers
3. Check integration: Ensure compatibility with your accounting software
4. Start small: Consider outsourcing specific tasks before full service

Many businesses find that cloud-based payroll software integrated with their accounting system offers the perfect balance of automation and control. Try Xero for free to see how streamlined payroll can work for your business.

FAQs on payroll outsourcing

Here are answers to some common questions about outsourcing your payroll.

Is it cheaper to outsource payroll?

When you compare the cost of a provider's fee against the time you spend on payroll, many businesses find outsourcing saves money. It also reduces the need to hire a dedicated payroll employee, which is a much larger expense.

Can I still use my accounting software if I outsource payroll?

Yes, and it's recommended. Many payroll providers can integrate directly with accounting software like Xero. This keeps your financial data in one place and makes bank reconciliation simpler, as payroll payments and tax liabilities are automatically recorded.

What information do I need to give a payroll provider?

To get started, you'll typically need to provide your business details, such as your Pay As You Earn (PAYE) reference number. You'll also need to supply employee information, including their name, address, tax code, and salary or hourly rate. Your provider will guide you through exactly what's needed.