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Payrolling: What Is It and What Are Its Benefits?
Payrolling involves partially handing over your responsibilities as an employer. A payroll company takes on both managing payroll and the legal employer duties for a company that has one or more employees.
The employee becomes part of the payroll managed by the payroll company while still working for the hiring company. This article covers all aspects of payrolling, including distinctions from employment agencies and the pros and cons of payrolling.
In payrolling, an employee is seconded to a company (referred to as the 'hirer') where they are needed.
The payroll office handles all administrative duties for the hirer, including payroll, contract creation and wage payment.
Payrolling is particularly beneficial for employees who have short-term positions with a company, reducing risk for the hirer.
- 1What is payroll? How does it differ from payrolling?
- 2What is a payroller and how much does payrolling cost?
- 3Advantages of payrolling for employers
- 4Disadvantages of payrolling for employers
- 5What does a payrolling contract look like?
- 6Cooperation between HR and the payrolling company
- 7Frequently Asked Questions
What is payroll? How does it differ from payrolling?
The term payroll refers to the process of managing employee payments. In the usual scenario, an employee is directly employed by a company and is part of that company's payroll.
However, when an employee is legally employed by a payroll company, the hirer (the company where the employee works) outsources the payroll management. In this payrolling arrangement, the employee is not formally hired by the company they work for. Instead, it's the payrolling company that becomes the legal employer, and the employee is then assigned to the client or 'hirer'.
What is a payroller and how much does payrolling cost?
A payroller takes on the responsibility of legally employing your staff. This includes tasks such as managing payroll administration, creating contracts, updating employee details, handling sick reports, pay slips and more. This offers significant time savings for employers, especially when dealing with short-term staff.
By transferring legal employment to the payroller, employers reduce their risks. For example, sickness insurance and premiums are fully managed by the payroll company. As an employer, you continue to select and manage your workforce, but the payroller handles all administrative aspects.
Payrollers usually operate on a pre-agreed, all-inclusive rate. They bill the hiring company for each hour worked by the employee. This rate covers not just the employee's salary, but also other costs typically borne by the employer, such as holiday pay, vacation days, pension contributions, and social charges.
The advantage of using a payroller is that your company pays a fixed hourly rate which encompasses premiums and payroll taxes. Typically, payrollers charge a rate based on the employee's salary. Additionally, the payroll company includes a small margin for their services, generally around 6-10%.
Advantages of payrolling for employers
Payrolling offers numerous advantages for employers compared to hiring through employment agencies or temporary staffing firms. The most significant benefit is that you are no longer the legal employer for employees hired through a payroll company. This also means you save valuable time on administrative tasks.
Here are some tangible benefits of payrolling:
Payrolling ensures meticulous management of your complex administration. Specialised payroll companies use advanced personnel and payroll administration software.
The risks associated with being a legal employer are shifted to the payroll company, providing upfront clarity about wage costs.
Employers using payrolling no longer bear the costs of absenteeism, incapacity, or severance payments.
Flexibility: Employers can easily bring in new employees and similarly let them go.
Disadvantages of payrolling for employers
Unfortunately, using payroll services can also have downsides for an employer. The drawbacks of payrolling for employers include:
Costs can be high if a payroll company lacks transparency in their cost structure.
Flexibility and shifting legal risks come at a price. The hourly rate you pay through a payroll company is usually higher than employing a permanent staff member.
Quality employees may end up working for another company through the payroll company.
Most payroll companies aren't available 24/7, which can create issues if last-minute administrative tasks arise.
What does a payrolling contract look like?
A payrolling contract is initially established among the employee (temporary worker), the payroll company and the hirer or company utilising the payroll service. The employee is formally employed by the payroll company. The payroll company manages paying the employee's salary and holiday allowance, as well as creating pay slips and annual statements.
Cooperation between HR and the payrolling company
Cooperation between HR and the payroll company involves overlapping tasks, but each party also has distinct responsibilities. The HR department primarily handles recruitment, selection, supervision and employee development, while the payroll company focuses on employment, payroll, personnel records and final payment for payroll employees. Effective collaboration between both parties is crucial.
For smaller organisations without an HR department, the payroll company can partially take over some HR tasks. In such cases, the payroll office might handle recruitment and selection, for example. Especially during uncertain times like the Covid-19 pandemic, these services can be valuable. This enables employers to focus their time on other matters.
Frequently Asked Questions
Is payrolling still allowed?
Yes, it is allowed. Payrolling, also known as "off-payroll working" or "contracting," refers to a situation where an individual works for a client through their own limited company or another type of intermediary, rather than being directly employed by the client. The individual is responsible for handling their own taxes and National Insurance contributions.
As of April 2021, changes to the IR35 rules in the private sector shifted the responsibility for determining the employment status of contractors from the contractor themselves to the client. This means that medium and large businesses are responsible for assessing whether contractors fall within the scope of IR35 and should be treated as employees for tax purposes. It's important for both contractors and clients to be aware of the rules.
What's the difference between an employment agency and a payrolling company?
While employment agencies and payroll companies share similarities, there are distinct differences. An employment agency primarily focuses on recruiting and selecting employees. In contrast, a payroll company relieves the employer of administrative tasks. With a payroll organisation, the employer retains responsibility for recruiting and selecting employees.
How does payrolling work in relation to tax?
In the context of employment, including payrolling, both employers and employees are required to contribute to National Insurance (NI) and pay Income Tax. National Insurance Contributions (NICs) fund various state benefits, including the state pension, unemployment benefits, and healthcare services.
Employee contributions: Employees' National Insurance contributions are deducted from their gross salary before they receive their net pay. The amount of NICs an employee pays depends on their income level and the specific class of NIC they fall into (Class 1, Class 1A, etc.).
Employer contributions: Employers also contribute to National Insurance on behalf of their employees. This is an additional cost for the employer on top of the employee's gross salary.
Income tax: Income Tax is levied on an individual's earnings above a certain threshold. The amount of Income Tax an individual pays depends on their total income and their tax code. Income Tax is deducted automatically from an employee's pay through the Pay As You Earn (PAYE) system.
PAYE system: The PAYE system is the way income tax and National Insurance are collected from employees' earnings. Employers deduct the necessary taxes and contributions from employees' salaries and remit them to HM Revenue & Customs (HMRC) on behalf of their employees.
What are the costs of payrolling?
The costs of payrolling in the UK can vary based on several factors, including the type of arrangement, the specific services provided, and the contractor's income. Here are some key considerations that contribute to the costs of payrolling:
National Insurance contributions (NICs)
Professional advice and administration
Company operating costs
We would like to inform you that the contents of our website (including any legal contributions) are for non-binding informational purposes only and does not in any way constitute legal advice. The content of this information cannot and is not intended to replace individual and binding legal advice from e.g. a lawyer that addresses your specific situation. In this respect, all information provided is without guarantee of correctness, completeness and up-to-dateness.