The question sounds simple. The answer depends on how many people you’re employing, what you’re paying them, and whether you’re honest about the cost of the time involved in running payroll yourself.
This guide models the numbers at different headcounts so you can see where the crossover sits — and identifies the factors that move it significantly in either direction.
What you’re actually comparing
This isn’t really two line items on a spreadsheet. It’s a comparison between paying a provider to absorb a set of costs and obligations, versus absorbing them yourself.
Running your own UK payroll involves: payroll software, HMRC registration and ongoing compliance, auto-enrolment pension setup and administration, statutory payment calculations (SSP, SMP, SPP), Real Time Information submissions to HMRC on or before every payday, year-end reporting (P60s, P11Ds), and the staff time to manage all of it. Every pound and every hour of that sits with you.
An EOR takes all of it in exchange for a monthly fee per employee.
The question is: does the EOR’s fee exceed what it would actually cost you to handle this yourself? And at what headcount does the answer change?
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The costs on each side
Running your own payroll
Software. HMRC’s Basic PAYE Tools is free and adequate for simple payrolls. Paid options — Xero Payroll, Sage, BrightPay, Moorepay — typically cost £5–£15 per employee per month, sometimes with a base fee. For 1–10 employees on standard PAYE, budget around £25–£100/month for something decent.
Staff time. If you’re doing payroll yourself as the founder or finance lead, the time cost is real even if it doesn’t show up as a line item. A straightforward monthly payroll for five employees, once the system is set up, takes a competent person two to four hours per month. At ten employees with leavers, mid-month starters, and the occasional statutory payment calculation, you’re closer to half a day. At 20+, you’re looking at dedicated resource.
HR administration. Right-to-work checks, contract management, leaver admin, staying current with employment law changes — someone has to do this. For very small headcounts it’s manageable. As headcount grows it becomes more specialised and more time-consuming.
Professional advice. Employment law queries, redundancy situations, disciplinary processes, auto-enrolment changes. Budget conservatively at £500–£2,000 per year for a small employer, rising with headcount and complexity.
Compliance risk. This is the cost that’s hardest to model but probably the most important to think about. HMRC late RTI penalties start at £100 per month. Auto-enrolment non-compliance fines range from £50 to £10,000 per day depending on employer size. A successful unfair dismissal claim costs, on average, around £10,000–£15,000. Most employers don’t face these costs. But the probability isn’t zero, and it’s meaningfully higher when compliance is under-resourced.
Using an EOR
Service fee. The monthly per-employee charge. For UK employment, established providers typically sit between £300 and £700. A realistic mid-range figure for a straightforward UK hire is £400–£500.
Employment costs. These are the same whether you use an EOR or run your own payroll — gross salary, employer National Insurance (13.8% on earnings above the £9,100 secondary threshold), and the 3% minimum employer pension contribution. These pass through the EOR and appear on your invoice. The EOR doesn’t add to them; it just handles them.
Onboarding and termination fees. One-off charges per hire and per leaver. Some providers charge neither; others charge £100–£300 per event. If you’re hiring and offboarding frequently, these add up.
The numbers at different headcounts
The models below assume a UK employee earning £40,000. Employer NI on that salary is approximately £4,270/year (£356/month). Employer pension at 3% is £1,200/year (£100/month). Total employment cost — salary plus NI plus pension — is roughly £45,470/year, or £3,789/month. This cost is the same either way. What we’re comparing is the overhead on top.
1 employee
In-house overhead: payroll software ~£30/month, staff time at maybe 30 minutes per month of a £50k salary employee ~£25/month, annualised professional advice allowance ~£40/month. Total: ~£95/month.
EOR overhead: service fee £400–£500/month, onboarding/termination amortised ~£15/month. Total: ~£415–£515/month.
Verdict: EOR costs roughly £300–£400 more per month. In-house wins on cost. But the question is whether the compliance exposure and time are worth £300–£400 a month for a single hire — and for a small business without dedicated HR expertise, many would say they’re not.
3 employees
In-house overhead: software ~£45/month, staff time ~£45/month (1.5 hours per month), advice allowance ~£50/month. Total: ~£140/month, or £47 per employee.
EOR overhead: 3 × £430 = £1,290/month.
Verdict: EOR costs roughly £1,150/month more. At three employees you’re also unlikely to have a dedicated HR person, so the in-house option depends heavily on the founder’s time. If that time is worth £80–£100/hour, the calculation looks different.
5 employees
In-house overhead: software ~£65/month, staff time for 3–4 hours per month of a £45k HR/finance employee ~£90/month, pension admin ~£30/month, advice allowance ~£60/month. Total: ~£245/month, or £49 per employee.
EOR overhead: 5 × £420 = £2,100/month.
Verdict: EOR costs approximately £1,855/month more. The gap is now substantial. If your HR function is competent and your employment arrangements are relatively straightforward, running your own payroll at five employees makes clear financial sense.
10 employees
In-house overhead: software ~£120/month, dedicated payroll/HR admin at roughly 0.25 FTE of a £35k employee ~£730/month, advice allowance ~£100/month. Total: ~£950/month, or £95 per employee.
EOR overhead: 10 × £400 = £4,000/month.
Verdict: EOR costs roughly £3,050/month more. There’s no credible cost argument for an EOR at this headcount unless your employment involves significant international complexity.
What actually determines your crossover
The models suggest in-house becomes clearly cost-competitive somewhere between three and five UK employees. But several things can move that line:
Your HR capability. If someone in your team already runs payroll well, in-house wins sooner. If you’d need to hire or outsource HR support to make it work, the advantage narrows.
Employment complexity. Standard PAYE employees on fixed salaries are easy. Variable pay, visa complications, complex benefits, or mid-year contract changes are harder. Complexity raises your in-house running cost and pushes the crossover point later.
Jurisdiction. This guide is about UK employment. If you’re using an EOR to hire in a country where you have no legal entity, in-house isn’t an alternative — you’d be comparing EOR to setting up a foreign subsidiary. That’s a different (and usually much more expensive) calculation.
Your time horizon. If you expect UK employment to be short-term — testing a market, covering a project — the setup cost of building your own payroll and pension scheme may not be worth it even at five or six employees.
Risk tolerance. Running payroll yourself is not zero-risk. Compliance errors happen. If a penalty or a tribunal claim traces to an under-resourced HR function, a few years of cost savings can disappear quickly. Some businesses factor this into the comparison explicitly. Others don’t until it becomes relevant.
Which makes best sense for your business?
For one or two UK employees: an EOR almost always makes sense unless you already have payroll infrastructure in place. The cost difference per hire is real but manageable, the compliance risk of doing it yourself is genuine, and the time saved is worth paying for.
At five or more employees with stable headcount and a capable HR function: in-house payroll tends to win on cost by a meaningful margin. The EOR service fee becomes a significant recurring expense that’s hard to justify when the administrative work is well within reach.
The messy middle is two to four employees, particularly for businesses in early growth where headcount is moving. There, the right answer depends on your situation. Model it with your actual salary levels and an honest estimate of your time cost, and the answer usually becomes obvious.
