What are payroll services?
Payroll services calculate what each employee is paid, deduct income tax, National Insurance, pension contributions and student loan repayments, and report all of it to HMRC.
You can buy this as software you run yourself, or as a fully managed service where a payroll bureau does the work and you simply approve the figures each month.
Every UK employer with staff on PAYE needs a compliant process, even a single-director company drawing a small salary.
How does it work?
Each pay period you submit hours, salary changes, starters and leavers. The system calculates gross to net pay, produces payslips and generates a Full Payment Submission for HMRC.
That RTI submission has to reach HMRC on or before payday. Pension contributions are assessed and filed with your scheme at the same time.
Here's a fictional example:
Meet Harper & Rowe Ltd
Harper & Rowe employs 22 people across two sites, with a mix of salaried staff and hourly-paid weekend cover.
The office manager was running payroll in a spreadsheet and filing manually, which took most of two days a month and produced two late-filing penalties in a year.
They moved to managed payroll at £6 per employee per month — around £132 a month, plus a £25 base fee.
Filing is now automatic, auto-enrolment is assessed each period, and the two days a month went back into the business.
What are the different types of payroll service?
Payroll software
You keep control and do the data entry, while the software handles calculations, payslips and RTI filing.
Costs are low — often £5 to £30 a month for a small team — but you carry responsibility for accuracy and deadlines.
Fully managed payroll
A bureau runs the payroll for you. You send the changes, they send back a report to approve, then everything is filed and payslips are distributed.
Typically £4 to £10 per employee per month plus a base fee, and the right answer when payroll is complex or nobody in-house wants to own it.
Umbrella and contractor payroll
Used where workers are engaged through agencies or inside IR35, with the umbrella acting as employer and handling deductions.
Check compliance credentials carefully here — the market has a long history of non-compliant schemes.
Which payroll option suits my business?
It usually comes down to headcount, complexity and who has time:
- 1
Under five employees
Low-cost software, or free HMRC Basic PAYE Tools if your needs are very simple and you don't mind manual pension work.
- 2
Five to fifty employees
Software with auto-enrolment built in, or a managed bureau if you have variable hours, shift premiums or high staff turnover.
- 3
Fifty or more employees
Managed payroll or an integrated HR and payroll platform, where the cost of an error and the volume of changes justify specialist support.
What do you need to run payroll?
Before your first pay run you'll need:
PAYE scheme registration: An employer PAYE reference and Accounts Office reference from HMRC. Registration takes up to two weeks.
Employee details: Full name, address, date of birth, National Insurance number, start date and starter declaration or P45.
A workplace pension scheme: Auto-enrolment is a legal duty. Nest, The People's Pension and Smart Pension are the common choices.
Year-to-date figures: If you're switching mid-year, the new provider needs each employee's pay and deductions so far this tax year.
Payment method: Bacs or Faster Payments to pay staff, plus a way to pay HMRC by the 22nd of the following month.
How to compare payroll providers
Look past the headline per-employee price at these three things:
- 1
True cost per pay run
A quote of £4 per employee sounds clear until you add the monthly base fee, charges for weekly rather than monthly runs, extra payslip fees and year-end P60 costs. Ask for the annual total on your actual headcount and pay frequency.
- 2
Compliance coverage
RTI filing, auto-enrolment assessment and re-enrolment, statutory sick and parental pay, P11D benefits and year-end reporting should all be included. Anything charged as an extra is a cost you'll meet eventually.
- 3
Support and reputation
When payday is Friday and the figures are wrong on Thursday, response time is everything. Check whether you get a named adviser or a ticket queue, and read reviews from businesses of a similar size.
Benefits and drawbacks of outsourced payroll
Pros
- Filing deadlines met without you tracking them
- Fewer costly calculation errors
- Auto-enrolment handled automatically
- Frees up days of admin every month
Cons
- An ongoing per-employee cost
- Less immediate control over changes
- Switching mid-year needs careful data transfer
- Some bureaux charge for every off-cycle change
Why choose managed payroll over doing it in-house?
In-house software is cheaper on paper. The real comparison is software cost plus the hours it takes plus the risk of getting something wrong.
HMRC penalties for late RTI filing start at £100 a month for small employers and rise with headcount. A single underpaid pension contribution can trigger a Pensions Regulator notice.
If payroll runs smoothly today and someone genuinely owns it, software is fine. If it depends on one person who's about to go on leave, managed payroll buys resilience.
What if a payroll error happens?
Correct it in the next pay run where the amount is small, or make an off-cycle payment and file an amended submission where an employee has been underpaid materially.
Overpayments must be recovered carefully. You need the employee's agreement to a repayment plan in most cases, and deductions from future pay have to be lawful under the contract.
A managed provider carries professional indemnity cover for errors they cause — worth confirming the level before you sign.
What are the alternatives to a payroll provider?
If a paid service isn't right yet:
HMRC Basic PAYE Tools
Free software for employers with fewer than ten employees. It handles RTI filing but not payslips or auto-enrolment assessment, so you'll need workarounds.
Your accountant
Many accountants run payroll as part of a bundled service. Convenient and cheap at small headcounts, but check turnaround times before peak periods.
HR and payroll platforms
Combined systems that handle contracts, holiday and payroll in one place, which makes sense once people admin is taking real time.
FAQs
About this guide
Written and reviewed by the Grow Your Business team, and kept up to date as rates, rules and provider terms change.
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