HR Outsourcing vs. In-House: A Guide for Small Businesses

As your small business grows, managing your staff becomes increasingly complex. Hiring, handling holiday requests, navigating sensitive conversations, staying compliant, it all takes time and expertise. And if you’re like most small business owners, you’ve probably found yourself at a crossroads between:

• Bringing an HR advisor in-house or

• Outsourcing HR to an external firm or contractor 

Getting that decision right can have a profound impact on your business’s budget, flexibility, and long-term goals, so it’s worth taking some time to weigh up your options. 

In this guide, we’re exploring all the key differences between in-house HR and outsourcing HR, covering the costs, benefits, and practical points to think about when deciding what’s right for your business.

What’s the difference between in-house HR and outsourced HR?

If you’re not familiar with in-house HR vs outsourced HR, here are some key definitions: 

• In-house HR means having someone on your payroll (either full-time or part-time) who handles HR. This could be a dedicated HR manager. Or, it could be someone in your team who’s taken on HR tasks alongside other responsibilities. 

• Outsourced HR is when you work with an external provider who supports your business with HR tasks and strategy. This could be a freelance consultant, a retained service, or a flexible HR partner (like The Fractional HR Department).

It’s not always an “either-or” decision, either. Many small businesses take a blended approach that keeps some HR responsibilities internally, while bringing on some extra external help for more complex, sensitive, or strategic HR work.

4 considerations you need to make when choosing between in-house and outsourced HR

When you’re deciding between in-house HR and outsourced support, it helps to look at the areas that matter most for your business. Below, we’ve broken down four key factors that are often the most important for small businesses.

1. Cost and value 

Deciding between in-house HR and outsourcing often starts with understanding the financial impact. 

When hiring in-house, costs go far beyond the base salary, with key costs including:

• Base Salary: Depending on experience, salaries range from:

• HR Coordinator/Administrator: £25,000-£35,000 annually.

• HR Manager: £45,000-£60,000 annually.

• Head of HR/HR Director: £70,000+ annually.

• Employer National Insurance Contributions: £4,000-£6,000 annually for a £45,000 salary.

• Pension Contributions: Around £2,250 annually at 5%.

• Recruitment Fees: Up to 30% of the annual salary if you use an external recruiter, potentially £18,000 for a £60,000 hire.

• Training and Development: Essential for keeping your HR team up-to-date on compliance, best practices, and HR trends.

Taking these additional costs into consideration, the estimated annual cost of an HR Manager with a base salary of £50,000 starts at around £70,000. 

Outsourcing, on the other hand, offers a more cost-effective alternative. Unlike hiring in-house, outsourcing eliminates recruitment fees, National Insurance, and pension contributions. Instead, you pay a transparent monthly fee that can be customised to your exact needs.

For example, when you work with us at the Fractional HR Department, you receive: 

• Comprehensive day-to-day HR management

• Scalable HR systems, processes, and resources built for growth

• Full 52-week coverage

This means you get the expertise of an entire HR team, without the overhead of hiring in-house.  

Depending on the size of your business and the services you need, the monthly cost is typically in the region of £1,500 to £5,000 per month, or £20,000-£60,000 per year. 

2. HR expertise and experience 

The type of HR expertise you need depends on your business goals and the challenges you face. 

An in-house HR professional will likely have deep expertise in specific areas, such as employee relations, leadership development, or recruitment. However, they may lack broader skills in compliance, strategic HR planning, or culture development.

For example:

• Recruitment specialists are excellent at managing the hiring process, but they don’t normally have experience in compliance or employee development.

• HR generalists have good all-round HR knowledge and are often very skilled in managing employee relations, but they may struggle with strategic HR planning or projects surrounding pay or benefits. 

As your business grows, gaps in your expertise may become more evident. To fill these gaps, you might need to hire additional team members or consultants, which all adds to the cost and complexity of maintaining an in-house HR team.

Outsourced HR providers offer access to a diverse team of professionals with expertise across all areas of HR. This is particularly beneficial for small businesses that require support in multiple areas, such as:

• Legal compliance and employment law

• Strategic HR planning

• Recruitment and onboarding

• Performance management and culture-building

By outsourcing, you gain access to expertise that can evolve with your business without the cost of hiring multiple specialists.

3. Flexibility and scalability

The ability to adapt your HR approach to fit your business is critical as you grow or as your goals change.

An in-house HR hire is a fixed asset, which can limit flexibility:

• If your business needs increase, you may need to recruit additional HR staff.

• If your business faces financial strain, reducing in-house HR costs can be challenging due to redundancy laws and employer obligations.

Outsourcing HR allows you to scale support up or down based on your requirements:

• As your business grows, you can access additional resources or expertise without the need to recruit.

• If your needs change, you can adjust the scope of services and costs accordingly.

For example, with our team at the Fractional HR Department, you can start with just getting the essentials in place, then expand to include more strategic HR projects as your business evolves.

4. Responsiveness and continuity

Making sure your business has continuous HR support is not only essential for compliance, but it also keeps your employees happy and satisfied.

While an in-house HR professional offers on-site presence, they will also need time off for:

• Holidays

• Sickness

• Other types of personal leave (such as maternity or carers leave)

During these periods, HR tasks may be delayed or passed to other team members, potentially impacting compliance and/or employee relations.

Outsourcing allows you to have uninterrupted HR support, which typically includes: 

• Full 52-week coverage, so there are no gaps during holidays or sick leave.

• Access to a team of professionals who maintain a consistent service regardless of individual availability.

This level of continuity is especially helpful for small businesses that can’t afford to have HR responsibilities left unaddressed.

Making the right decision for your business

So how do the pros and cons stack up? Here’s a table to help you evaluate your options. 

Category	In-House HR	Outsourced HR
Cost and Value	Salaries range from £25k to £70k+, depending on the role. Additional costs include NI, pension, recruitment, and training. An estimated £70k+ annually for an HR Manager.	No employer contributions or recruitment fees. Transparent monthly fees typically range from £1,500 to £5,000 per month. Full service without full-time costs.
HR Expertise	Specific hires can offer deep but limited expertise (for example, recruitment or pay/benefits). Gaps in skills may require hiring additional staff.	Access to a wide range of HR specialists. Covers compliance, strategy, culture, and more. Scales with your business needs.
Flexibility & Scalability	Fixed capacity and cost. Harder to reduce costs or expand rapidly. May need extra hires during growth.	Support can be scaled up or down easily. Start small and grow services over time. Ideal for businesses in transition.
Responsiveness & Continuity	Limited by individual availability (holidays, sickness, leave). Risk of gaps in HR coverage.	Full 52-week coverage. Team-based approach to maintain continuity. Reliable support even during busy periods or holidays.

If you still can’t decide, it can be helpful to set aside some time with yourself and/or your management team and answer the following questions: 

• Budget: Can your business afford the total cost of hiring in-house, or would a fractional service be more cost-effective?

• Expertise Needed: Does your business require broad HR expertise across multiple areas, or just a specific focus?

• Flexibility: Do you need scalable support that grows with your business?

• Ease of management: Do you want to take on someone who will need line management and personal development, or would you prefer to manage a support contract?

Finding it hard to choose between in-house and outsourced HR?

Our 12-Month HR in a Year Programme combines the best of both worlds, offering small businesses a blend of in-house and outsourced HR benefits. 

Here’s what you can expect when you work with us: 

• Dedicated Support: A named People Partner as your main point of contact, plus access to a team of HR experts.

• Year-Round Coverage: 52 weeks of HR support to handle your day-to-day HR needs.

• Customised Solutions: Development of HR systems, policies, and processes to fit your business.

• Manager Development: Training and coaching for managers to build internal leadership capability, plus we can train someone in-house on how to manage your HR.

• Scalable HR Function: Over the course of 12 months, we can create a scalable HR framework that’s perfectly aligned with your business goals.

• Flexible Options After 12 Months: Transition to in-house HR with our help recruiting or training a team member. You can then continue with our flexible, ongoing support. 

For less than the cost of hiring an in-house HR manager, this programme delivers a professional HR function, while also enhancing your internal HR capability. It’s the ideal solution for growing businesses that need expert HR support without the long-term overheads.  

To learn more about our 12-month HR programme, visit: HR in a Year. 

Which option is right for your small business?

As a growing small business, it’s important to never lose sight of the fact that your people are your greatest asset. By choosing the right HR solution, you can create an environment where your team can thrive and your business can grow. 

When it comes to choosing between hiring in-house or outsourcing HR, there really isn’t a universal answer. It all depends on where your business is now, where you want it to go, and how much time, budget, and capacity you have to invest in your people function.  

Need help deciding between hiring in-house or outsourcing your HR department?

Get in touch, and we’d love to chat over a virtual coffee and help point you in the direction that best fits your business, goals, and budget.