Payrolling: What Is It and What Are Its Benefits?

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'.

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%.

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.

Simplify your payroll tasks

Prepare your payroll more efficiently for accounts. Enable employees to change personal data themselves that HR approves. Working hours and bonus details are automatically transferred to your payroll system.

Streamline How You Pay Employees

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.

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 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.

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.

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.

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.

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:

• Contractor's income

• National Insurance contributions (NICs)

• Income tax

• Business expenses

• IR35 status

• Professional advice and administration

• Other costs

• Company operating costs