Most small business owners who run payroll themselves have never actually calculated what it costs them. They know the price of their software subscription. They might know what they pay their accountant for a year end tidy up. But they almost certainly haven’t added up the hours they spend each month processing pay runs, chasing HMRC queries, updating tax codes, and keeping up with legislative changes. When they do, the numbers usually surprise them.
This guide breaks down the real cost of running payroll in house versus outsourcing it, specifically for micro businesses (1 to 9 employees) and small businesses (10 to 49 employees) in the UK.
The time and cost figures below are illustrative examples, not a quote. Your actual return will depend on headcount, pay frequency, complexity and the value of the time released.
The true cost of in house payroll
Start with time. The time spent on in-house payroll varies by headcount, pay frequency, staffing changes and complexity. Track the actual hours used for data entry, calculations, payslips, HMRC submissions, payments, pension files, starters, leavers and employee queries before comparing options.
To estimate opportunity cost, multiply those recorded hours by a clearly labelled value for the owner’s time. Treat that hourly value as an assumption rather than a market benchmark.
Then there’s software. Cloud based payroll software is charged as a monthly subscription, with the cost depending on headcount and features, so check current provider price lists. More capable systems that handle auto enrolment, CIS, and benefits in kind typically cost more. On top of that, most software requires annual updates for new tax year thresholds and rates, which may or may not be included in the subscription. Errors add another cost that is harder to predict. When an error results in an employee being underpaid, overpaid, or a late RTI submission, the cost isn’t just the correction time. It’s potential HMRC penalties (starting at £100 a month for employers with 1 to 9 employees; HMRC does not charge the first late filing failure in a tax year unless the employer operates an annual PAYE scheme), employee trust damage, and in some cases employment tribunal exposure. The benefits of outsourcing payroll extend well beyond the monthly fee.
What outsourced payroll actually costs
Payroll outsourcing prices vary by provider, service level, pay frequency and complexity. Obtain dated, like-for-like written quotes and compare them with the full recorded in-house cost rather than relying on generic market ranges.
A fully managed service means the bureau handles everything: processing the pay run, submitting the FPS and EPS to HMRC, generating compliant payslips, calculating statutory payments, managing auto enrolment, issuing P45s and P60s, and handling year end filing. The employer’s role reduces to providing the input data each month (hours worked, new starters, leavers, pay changes) and reviewing the output before it’s finalised.
Ask Purely Payroll for a current quote based on your headcount, pay frequency and requirements, or review the current information on our payroll pricing page.
The ROI calculation
The following calculation is illustrative only. It uses assumed figures that are not Purely Payroll prices or market averages.
Illustrative in-house assumptions per month: five hours of owner time at an assumed £50 per hour = £250; software = £15; pension-platform fees = £30. On those assumptions, the total is £295 per month or £3,540 per year. This example excludes any cost of correcting errors or late filings.
Illustrative outsourced assumption: £6 per employee for eight employees = £48 per month or £576 per year. This is an assumed figure for the calculation, not a current Purely Payroll price or market benchmark.
Illustrative arithmetic difference: £2,964 per year under the assumptions above. Actual costs, service scope and savings will vary, so use current written quotes and your own recorded in-house costs.
The ROI may change as employee numbers grow, but the result depends on how both in-house time and outsourced charges scale for the specific business and service.
What the numbers don’t show
The financial calculation is only part of the picture. There are costs that don’t appear on any spreadsheet but matter enormously to small business owners.
Single point of failure. If you’re the only person who knows how to run payroll, what happens when you’re ill, on holiday, or unavailable on payday? In house payroll in most small businesses runs through one person. When that person isn’t available, payroll either doesn’t happen or gets done badly by someone unfamiliar with the process. A payroll bureau operates regardless of your availability.
Legislative burden. Employer NIC thresholds, NMW rates, student loan plan types, statutory payment rates, auto enrolment thresholds, and benefits in kind rules all change regularly. In 2026/27 alone, employers need to handle new SSP rules, Student Loan Plan 5, and prepare for phased mandatory payrolling of benefits in kind: cars, car fuel, vans, van fuel and employer-provided medical benefits from April 2027, with most other in-scope benefits following from April 2028. Keeping up with all of this is a job in itself.
Mental load. Payroll sits in the back of every business owner’s mind throughout the month. Deadlines, accuracy, HMRC compliance. Outsourcing can reduce that burden, although the employer still needs to provide information, review outputs and meet its legal responsibilities. It’s one fewer thing to worry about, which has real value even if it doesn’t show up in a cost comparison.
The decision to outsource payroll is rarely about a single number. It’s about whether the time, risk, and mental energy are worth the relatively modest cost of having a specialist handle it. For most micro and small businesses, the answer is clearly yes. Read what our clients say about the difference outsourcing has made, or get in touch to discuss how we can help your business.
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