When you first set up payroll, cost is a reasonable thing to think about. If you have one or two employees — or you are a director paying yourself a salary — you do not necessarily want to spend a fortune on the admin that sits behind it. The cheapest way to run payroll in the UK is, on the surface, free: HMRC provides a tool for exactly this purpose. But free comes with caveats, and those caveats matter more as your business grows.

In our experience, the businesses that end up with payroll problems are rarely the ones that overspent. They are the ones that picked the lowest-cost route without fully understanding what it covered — and then hit a compliance issue they did not see coming. This post sets out your options honestly, with a view to helping you choose correctly, not just cheaply.

HMRC offers a free desktop application called Basic PAYE Tools — and for a very small employer, it does the job it is designed to do. You can calculate PAYE and National Insurance, submit Real Time Information (RTI) filings to HMRC, and produce basic payslips. For a sole director paying themselves a modest salary once a month, this is a workable setup.

The limitations appear quickly once your situation is anything other than straightforward. Basic PAYE Tools does not support CIS deductions for subcontractors. It handles pension auto-enrolment poorly — you will need to manage your workplace pension contributions separately, which creates room for error. Year-end tasks like P60 production and P11D filing for benefits in kind are not fully supported.

There is also an operational fragility to it. The tool runs locally on your computer, so if your machine fails or you switch devices, you can lose your payroll records. It is not cloud-based, which means no built-in backup and no easy access for a second person to review the figures.

Business owners on forums have described it as a false economy — not because it does not work at all, but because the time it takes to work around its limitations, and the risk of getting something wrong, starts to outweigh the saving fairly quickly. We would not recommend it for anyone with more than two or three employees, anyone running CIS payroll, or anyone who has staff with variable hours, multiple pay elements, or benefits.

The next step up is dedicated payroll software. The UK market has several options priced for small businesses, and monthly costs typically start at a few pounds per employee. Most cloud-based tools handle RTI submissions to HMRC, auto-enrolment pension reporting, payslip distribution, and year-end P60s automatically — which removes a significant amount of manual work compared to Basic PAYE Tools.

The pricing model varies. Some platforms charge per payslip, others per employee per month, and others per pay run. For a single-employee limited company, a basic plan can cost less than a few pounds a month. For a business with ten employees running weekly payroll, the cost starts to add up — and that is before you factor in add-ons for P11D filing, CIS, or HR features.

The honest caveat with cheaper payroll software is scalability. A platform that works well for a small team with simple pay arrangements can become limiting once you have more complex needs: multiple pay rates, shift patterns, salary sacrifice schemes, or employees with irregular hours. Feature gaps in lower-tier plans sometimes leave businesses with a tool that handles the basics but still requires manual workarounds for anything more involved.

There is also a compliance dimension. Payroll errors — submitting the wrong figures to HMRC, failing to correctly calculate statutory sick pay, or missing pension submission deadlines — can lead to penalties. The software itself will not catch every mistake; you still need someone who understands the rules to check the outputs. If you are confident with payroll and your situation is simple, good software can be a sensible low-cost solution. If you are not confident, the software alone is not enough.

UK payroll outsourcing typically costs somewhere between £3 and £8 per payslip, or a monthly fee based on your employee headcount. For a business with a handful of employees, that can work out to less than you might expect — and the figure covers professional preparation, RTI submissions, pension reporting, and year-end compliance in one.

The case for outsourcing is not just about cost. It is about what you get in exchange. An accountant running your payroll will catch errors before they become HMRC problems. They will flag changes in legislation — National Minimum Wage uplifts, changes to NI thresholds, auto-enrolment contribution rates — so you do not have to monitor them yourself. P11D forms for benefits in kind, CIS returns for construction businesses, and P45s when staff leave are all handled without you needing to think about them.

For directors of limited companies in particular, there is a strong argument for keeping payroll with your accountant rather than running it separately. Director salaries often sit at a specific threshold for tax efficiency, and the interaction between salary, dividends, and National Insurance is something your accountant should be across. Running payroll yourself, separately from the rest of your accounts, can create disconnects that cost you more in the long run.

At Wings Online Filings, we provide payroll as a quoted service because the cost depends on your headcount and payroll frequency — but the price is always transparent and set before we begin. If you want to know what it would cost for your business, a quick conversation is usually all it takes.

It is worth being direct about the downside risk, because it shapes the real maths of payroll costs.

HMRC can issue late filing penalties for RTI submissions that are submitted after the payment date. The penalty starts at £100 per month for small employers and scales up. Errors in PAYE calculations — underpaying tax or NI — can result in HMRC issuing a notice requiring the employer to make good the shortfall, sometimes with interest. Auto-enrolment non-compliance is policed by The Pensions Regulator, which issues fixed penalty notices starting at £400 and escalating daily for continued non-compliance.

None of these are hypothetical. HMRC and TPR both have active compliance programmes, and small employers are not exempt from scrutiny. A single penalty notice can easily exceed a full year’s cost of having a professional run your payroll.

There is also a softer cost: the time you spend on payroll admin is time not spent on your business. If payroll is taking you two or three hours a month — checking figures, sorting pension uploads, reading HMRC guidance — that is a real cost, even if it does not appear on an invoice. For most small business owners, time has a value that makes outsourcing look considerably more attractive than the headline fee comparison suggests.

The businesses most likely to come unstuck are those that start on a free or very cheap solution, grow past the point where it is adequate, but do not switch because changing feels like effort. If that sounds familiar, it is worth revisiting the setup now rather than when something goes wrong.