Hiring your first employee is a milestone for any small business, and definitely something to celebrate. But alongside the excitement of expanding your team comes the unavoidable reality of payroll costs.

It’s not just salaries you need to budget for. There’s National Insurance, pension contributions, holiday pay, sick pay and more. Add in the admin of making sure HMRC gets the right information on time, and payroll can quickly feel like a job in itself!

So, should you handle payroll in-house or outsource it to a professional? In this guide, we’ll unpack what payroll costs really involve, how to calculate them and the pros and cons of keeping payroll in-house versus outsourcing.

What are payroll costs?

Payroll costs are the total expenses your business incurs to employ people. They include more than just the headline salary and often cover:

• Gross wages or salary: The agreed amount you pay your employee before deductions (with the UK National Living Wage for ages 21+ currently being a minimum of £12.21/hour in the UK).
• Employer’s National Insurance Contributions (NICs): For most employees, you pay NICs at 15% on earnings above £5,000 a year.
• Employer pension contributions: If your employee qualifies for auto-enrolment, you’ll need to contribute at least 3% of their qualifying earnings to a workplace pension.
• Holiday pay: Most full-time employees are entitled to at least 28 days of paid holiday per year (including bank holidays).
• Statutory payments: Such as Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP), which may be partially reclaimable from HMRC.
• Payroll software or provider fees: If you use paid software or outsource your payroll.
• Training and onboarding costs: Often overlooked, but part of the true cost of bringing someone into your team.

By understanding the full picture, you can better plan your hiring budget.

Calculating payroll costs

Let’s say you hire an employee on £28,000 a year. Here’s a simplified example of how your payroll costs might look in 2025:

• Salary: £28,000
• Employer NICs: Approx. £3,450 (15% on earnings over £5,100). However, if your business is eligible for Employment Allowance (currently worth up to £10,500 per year), you can reduce your employer NIC bill accordingly. Many small businesses qualify, so it’s worth checking before you set your payroll budget.
• Employer pension contributions: Approximately £840 (3% of qualifying earnings)
• Payroll software: £100/year (if managing in-house)

Estimated total annual payroll cost: £32,390

That’s without factoring in paid holiday, sick leave or training. In reality, your annual cost of employing that person could easily be 20 to 30% higher than their basic salary.

Payroll compliance

Payroll isn’t just about paying your team on time. You’re also responsible for:

• Running payroll under HMRC’s Real Time Information (RTI) system: Submitting details of employee pay and deductions every time you pay them.
• Calculating and deducting PAYE and employee NICs: Then sending these to HMRC.
• Auto-enrolling eligible employees into a workplace pension: And handling opt-outs or contribution changes.
• Issuing payslips: Every pay period, showing gross pay, deductions and net pay.
• Year-end reporting: Including P60s for employees and final payroll submissions to HMRC.
  

Mistakes can lead to penalties, unhappy employees and extra admin to put things right. That’s why deciding between in-house and outsourced payroll is such an important decision. To help you choose which is right for you, here’s an overview of the key pros and cons of each option: 

In-house payroll: the pros and cons

Pros:

• Cost savings (sometimes): If you’ve not got many employees and are confident with using payroll software, in-house can be cheaper than outsourcing.
• Full control: You oversee every detail and can process payroll when it suits you.
• Familiarity: You or your team know the specifics of your employees’ contracts, benefits and pay structures.

Cons:

• Can be time-consuming: Even small payrolls take time to run accurately and meet HMRC deadlines.
• Expertise required: You’ll need to stay on top of tax law changes, pension rules and statutory payments.
• Risk of mistakes: Calculation errors or missed deadlines can lead to penalties from HMRC.

If you’re running a very small team and have the time (and confidence) to manage the legal and technical side, in-house might work. But it’s worth factoring in the time you’ll spend on payroll admin - time that could be spent growing your business.

Outsourced payroll: the pros and cons

Pros:

• Saves time: You hand over the admin to experts, freeing you up for core business tasks.
• Accuracy and compliance: Professional payroll providers keep up with legislation and make sure your submissions are correct.
• Scalability: As your team grows, your payroll provider can handle the increased workload without extra strain on your side.

Cons:

• Ongoing fees: Outsourcing is an additional expense, with costs usually charged per payslip or per employee per month.
• Less direct control: You’ll need to work to your provider’s timelines and processes.
• Data security: You’ll be sharing sensitive employee data, so you have to choose a reputable provider with strong security measures.

For many small businesses, the time saved and reduced stress of outsourcing payroll more than offsets the cost - especially if you’re not confident in handling tax and compliance yourself.

Payroll software: the middle ground

If you’re not ready to fully outsource but want to make in-house payroll easier, cloud-based payroll software can be a game-changer.

The right software will:

• Calculate tax, NICs and pension contributions automatically
• File RTI submissions to HMRC
• Generate payslips for employees
• Integrate with your accounting software
• Help you stay compliant with payroll legislation

Prices vary from free options (with basic features) to £10 to £30 per month for more advanced, MTD-compliant tools.

Budgeting for payroll in 2025

When planning payroll costs this year, think beyond the monthly salary figure. Include:

• Employer NICs
• Pension contributions
• Payroll software or outsourcing fees
• Holiday and sick pay
• Training and onboarding
• Equipment and workspace costs

Remember: hiring is an investment. By budgeting realistically for payroll, you can grow your team sustainably and avoid cash flow issues.

Choosing the right option for your business

Whether in-house or outsourced is best for you ultimately depends on:

• Your budget: Outsourcing is more expensive upfront but could save time (and avoid mistakes).
• Your time: If payroll admin distracts you from higher-value work, outsourcing might be worth it.
• Your confidence with compliance: If staying up-to-date with payroll law isn’t your strong suit, outsourcing can provide peace of mind.

Whichever option you choose, we’d recommend having a read of our guide to setting up payroll for the first time in the UK before you get started. 

Payroll simplified

Payroll might not be the most exciting part of running your small business, but it’s essential to keep your team happy, keep HMRC happy and keep your records accurate.

If you’d rather focus on running your business than running payroll, an online accountant like one of our friendly experts at Crunch can take care of everything - from calculating your payroll costs to making sure every HMRC submission is on time.

That way, you can hire with confidence, knowing your payroll is accurate, compliant and stress-free.

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