What a UK payroll actually costs to run in-house
Ask what payroll costs and most people quote the software subscription. That is the one line on the bill you can see, and it is rarely the biggest. The rest sits inside somebody's salary, inside the April scramble, and inside the month it goes wrong. This is the whole bill, line by line, so you can price it properly before deciding who runs it.
The short version. In-house payroll costs software, plus the employed time of whoever runs it, plus cover when they are away, plus keeping up with rule changes, plus the penalties and correction work when a deadline is missed. Only the first of those arrives as an invoice, which is why the total is usually underestimated.
The six lines on the real bill
| Cost line | What it covers | Arrives as an invoice? |
|---|---|---|
| Software | Calculating tax and National Insurance, payslips, sending the FPS to HMRC. HMRC's free Basic PAYE Tools covers businesses with fewer than 10 employees and has limitations; paid packages usually price by headcount. | Yes |
| The person's time | Collecting changes, running and checking the pay run, payslips, filing, paying HMRC by the 22nd, answering queries. | No, it is inside a salary |
| Pension administration | Assessing staff, contributions to the provider, the letters, opt-outs and re-enrolment every three years. | Partly |
| Cover | Somebody who can run the payroll when that person is on holiday, off sick or leaves. | No |
| Keeping current | New rates and thresholds every April, and the occasional mid-year change. | No |
| Getting it wrong | HMRC and Pensions Regulator penalties, interest, and the hours spent correcting earlier pay runs. | Only when it happens |
Records are a quiet seventh line. Payroll records have to be kept for 3 years from the end of the tax year they relate to, so whatever system you use has to keep producing them long after you have moved on from it.
What the time actually costs
Time is the line people skip, because nobody is paid extra for it. But the person running payroll is an employee, and an employee costs more than their salary. At 2026/27 rates, employer's National Insurance is 15% on earnings above £5,000 a year, and the minimum employer pension contribution is 3% of qualifying earnings, which start at £6,240. Our employer's National Insurance guide and the 2026/27 rates page set out where those figures come from.
Take a fictional commercial bakery in Carlisle with fourteen staff on a monthly payroll. Its finance assistant runs payroll alongside everything else and reckons it takes about a day a week once queries, starters and leavers are included.
| Item, at 2026/27 rates | Per year |
|---|---|
| Salary (assumed) | £27,000.00 |
| Employer's NI, 15% of £22,000 above the £5,000 threshold | £3,300.00 |
| Employer pension, 3% of £20,760 qualifying earnings | £622.80 |
| Full cost of employing her | £30,922.80 |
| One day in five spent on payroll | £6,184.56, about £515 a month |
That is before the software, before any cover, and before any Employment Allowance, which reduces the business's total employer NI bill rather than the cost of any one person. Your own figure will differ, so put your own salary and your own honest estimate of the hours into the same sum. Details are illustrative and invented.
The cost of it going wrong once
This is the line that turns a cheap payroll into an expensive one. These are the published penalties, read on GOV.UK and The Pensions Regulator's site in October 2026.
| What went wrong | What it can cost |
|---|---|
| FPS sent late | A monthly penalty by headcount: £100 for 1 to 9 employees, £200 for 10 to 49, £300 for 50 to 249, £400 for 250 or more. Your first late report in a tax year is not penalised, unless you are registered as an annual scheme. |
| PAYE paid late | Your first late payment in the tax year does not count. After that, 1% of the late amount for 1 to 3 defaults, rising to 4% for 10 or more, plus 5% if still unpaid after 6 months, another 5% after 12, and daily interest throughout. |
| Pension duties missed | If a compliance notice is ignored, a £400 fixed penalty, then an escalating penalty charged at a daily rate between £50 and £10,000. |
The penalty is rarely the largest part. Unpicking a wrong tax code or a missed starter across several pay runs takes hours, and an employee who has been paid wrongly stops trusting the payslip. If HMRC's letter has already arrived, what to do when HMRC says you owe PAYE walks through the next steps.
Three costs nobody budgets for
The three weeks someone is away
If one person runs payroll, payday depends on that person being there. Training a second person costs their time too, and a second person who runs payroll twice a year is slower and more error-prone than the first. Ask what happens if your payroll person is off for three weeks across a payday. If nobody can answer, that is a cost you are carrying as a risk.
April, every year
Rates, thresholds and statutory pay change each April, and occasionally mid-year. Software updates the tables, but someone still has to understand what changed, check the first run against it and explain it to staff who notice a different figure on their payslip.
The leaving cost
When the person who runs payroll resigns, the knowledge goes with them: which employee is on a deduction order, why one tax code looks odd, where the pension login lives. Rebuilding that takes far longer than the notice period.
When in-house is the cheaper answer
Sometimes it is. A small, stable team with nothing changing month to month, run by someone who has spare capacity and enjoys it, can be cheaper in-house even with everything above counted. A larger business with a dedicated payroll person who is busy all month can be too. The point is to compare the full bill, not the licence fee. For the side by side with outsourcing, see DIY payroll versus outsourcing, and our own fixed fees are on the pricing page.
Put your real figure next to a fixed fee
Tell us your headcount, how often you pay and who runs payroll today. We will give you a fixed monthly quote to set against your own in-house sum, and if your numbers say keep it in-house, we will say so.
Get startedCommon questions
Is HMRC's free payroll software enough?
For some employers, yes. Basic PAYE Tools is free for businesses with fewer than 10 employees and works out tax and National Insurance and sends the information to HMRC. HMRC say it has limitations, and it does not replace the time and judgement the rest of the job needs, so the software line falls to nothing while the other lines stay.
How do I work out the cost of the time?
Take the full cost of employing the person who runs payroll, meaning salary plus employer's National Insurance plus employer pension, and multiply it by the share of their time payroll really takes. Count the queries, starters, leavers and April, not just the pay run itself.
Is my first late FPS penalised?
No. HMRC do not penalise your first failure to report on time in a tax year, unless you are registered as an annual scheme. Later late reports in the same year are charged monthly by headcount, from £100 for 1 to 9 employees.
Read next
- DIY payroll versus outsourcing, for the honest comparison once you have your in-house figure.
- The full cost of a UK employee, for the same sum applied to any hire.
- Choosing a payroll bureau, if the sum points the other way.
- Employer of Record versus your own payroll, for overseas employers weighing a third route.
- RTI, the FPS and the EPS explained, for the filing behind the deadlines above.
General information about the cost of running UK payroll, not tax, legal or financial advice. Rates, thresholds and penalties are those published for the 2026/27 tax year as at October 2026 and can change. Please check your own position or get advice before acting.