Do I Need an On-Premise or Hosted PBX for My Business?

Choosing the right phone system isn’t just about picking a handset; it’s about deciding how your entire business communicates. "For many UK organisations, the decision comes down to whether to invest in an on-premise PBX or move to a hosted PBX. To help you make an informed choice, we've also compiled a guide to the Best Phone Systems for UK Small Businesses in 2025.

Both options can transform your communications, but each has its own pros, cons, and long-term implications. Making the wrong choice can lead to unnecessary costs, technical headaches, and frustrated staff.

In this guide, we’ll explain how both systems work, compare their features, and give you the practical, UK-specific advice you need to choose with confidence.

What is a PBX? 

PBX stands for Private Branch Exchange, your business’s internal phone system. It connects internal lines, routes incoming and outgoing calls, and supports features such as:

• Voicemail and call forwarding
• Conference calling
• Automated menus (IVR)
• Free internal calls between staff

Traditionally, PBX systems were physical units installed in offices. Today, you can choose between:

1. On-Premise PBX – Hardware located in your office, maintained by you or your IT team
2. Hosted PBX – Cloud-based, managed by a third-party provider

How On-Premise PBX Works 

An on-premise PBX is physically installed at your business location, usually within a dedicated server room or communications cabinet. It connects directly to your phone lines and internet, with all the hardware, such as servers, switches, and handsets, being owned outright or leased by your company. This means the entire system is under your control, from its configuration to its ongoing maintenance.

Key points:

• Significant upfront hardware costs
• Requires space for installation
• Managed in-house or by contracted engineers

Pros of On-Premise PBX 

• Full control over configuration and security
• Customisable to specific business needs
• Works for internal calls even if the internet goes down

Cons of On-Premise PBX 

• High initial investment
• Ongoing maintenance and upgrade costs
• Requires dedicated IT resources

How Hosted PBX Works 

A hosted PBX operates entirely in the cloud, with no bulky hardware to maintain on-site. Your service provider is responsible for managing the infrastructure, running the software, performing updates, and ensuring security. Your team simply connects to the system via the internet using desk phones, softphones, or mobile apps, allowing calls to be made and received from virtually anywhere. These cloud-based systems are often referred to as Voice over Internet Protocol (VoIP) systems, and they are perfect for modern, flexible workplaces.

Key points:

• Subscription-based pricing
• Minimal on-site hardware needed
• Provider handles all technical aspects

Pros of Hosted PBX 

• Low upfront costs
• Easily scalable, add or remove users quickly
• Automatic updates and security patches
• Perfect for remote or hybrid teams

Cons of Hosted PBX 

• Internet-dependent for call quality
• Less control over customisation
• Potentially higher long-term costs for very large organisations

Total Cost of Ownership (TCO) Over 5 Years 

When evaluating PBX options, it’s important to look past the initial installation price and consider the total cost of ownership over time. Ongoing expenses such as maintenance, upgrades, and subscription fees can significantly affect the long-term value of your investment. Below is a rough 5-year cost comparison for a typical 20-user UK business to help illustrate the difference between on-premise and hosted PBX systems.

Bottom line: On-premise is capital-intensive but may be cheaper long-term for large firms. Hosted offers predictable monthly spend and minimal upkeep.

Internet & Infrastructure Requirements 

With a hosted PBX, the clarity, reliability, and overall performance of your calls are directly tied to the quality of your internet connection. Adequate bandwidth, low latency, and a stable network are essential to prevent issues such as audio dropouts, delays, or echo during conversations. This means businesses need to ensure their broadband can handle both voice and data traffic, ideally with a backup connection in place to maintain service continuity.

Minimum recommendations:

• Bandwidth: At least 100 Kbps per concurrent call
• Latency: Under 150ms
• Failover: Fibre or 4G/5G backup connection
• Power backup: UPS for networking equipment

On-premise systems still need quality internet for VoIP, but can handle internal calls without it.

Industry & Compliance Considerations 

Your industry sector can play a major role in determining which PBX solution is most suitable for your business. Different sectors have specific compliance and operational requirements that directly influence system choice:

• Finance & Insurance: Must meet FCA regulations for call recording, secure storage, and retrieval to maintain compliance and protect customer data.
• Healthcare: Required to adhere to GDPR and other data protection standards when handling sensitive patient information, ensuring confidentiality at all times.
• Legal Services: Often lean towards on-premise solutions to maintain strict control over data sovereignty and meet client confidentiality obligations.

If you opt for a hosted PBX, it’s vital to choose a provider that meets these compliance needs by offering:

• UK/EU-based data centres to comply with regional data storage laws
• GDPR-compliant processes for handling, storing, and transferring information
• End-to-end call encryption to safeguard conversations from unauthorised access

Scalability & Future-Proofing 

When deciding between an on-premise and a hosted PBX, it’s important to think beyond your immediate needs and consider how the system will cope with future changes. As your business expands, restructures, or embraces new technologies, your phone system should be able to grow and adapt without causing unnecessary cost, complexity, or disruption. Scalability and flexibility are key to ensuring your investment continues to meet your communication needs for years to come.

On-Premise:

• Scaling often means purchasing and physically installing additional hardware, which can be both time-consuming and expensive.
• Upgrades to add new features or improve performance may require significant investment and could disrupt day-to-day operations.

Hosted:

• Add or remove users instantly through a simple online dashboard, with changes taking effect almost immediately.
• Automatically benefits from new features and updates rolled out by the provider, without extra cost or manual installation.
• Integrates seamlessly with modern unified communication platforms such as video conferencing, instant messaging, and CRM tools, helping your business stay competitive and future-ready.

Mistakes to Avoid When Choosing a PBX 

Selecting the wrong PBX system can lead to higher costs, operational issues, and missed opportunities. To avoid costly missteps, keep these points in mind:

• Underestimating how fast your team might grow – Choosing a system that can’t scale easily could force an expensive upgrade sooner than expected.
• Ignoring internet reliability for hosted PBX – A poor connection can result in dropped calls and frustrated customers, so assess your broadband before committing.
• Choosing solely on price without checking SLAs – Low-cost providers may not guarantee the uptime or support your business needs.
• Overlooking staff training needs – Even the best PBX won’t deliver results if your team doesn’t know how to use its features effectively.
• Forgetting to budget for ongoing support and maintenance – Whether hosted or on-premise, factor in the long-term service and upkeep costs to avoid unpleasant surprises.

How to Assess Your Current Phone System 

Before deciding whether to invest in an on-premise or hosted PBX, it’s worth taking a close look at how your existing setup is performing. Use the following checklist to evaluate whether your current system is still meeting your needs:

• Do we have frequent call dropouts or poor sound quality? Consistent audio issues can harm customer satisfaction and make internal communication frustrating.
• Are we missing calls during busy periods? If customers can’t get through when it matters most, you could be losing sales or damaging your reputation.
• Is remote access a struggle? A modern PBX should support mobile devices and home workers without complicated workarounds.
• Are our maintenance bills creeping up? Rising costs for repairs, support, or upgrades may indicate it’s time for a more efficient system.
• Is our system more than seven years old? Older systems may lack modern features, have compatibility issues, and be more expensive to maintain.

If you answered yes to three or more of these questions, it’s a strong sign that reviewing and upgrading your PBX options should be a priority.

Which PBX Is Best for Your Business Type? 

The right PBX solution will depend on your organisation’s size, structure, and operational priorities. Here’s a quick guide to help match each option to the type of business it suits best:

On-Premise PBX:

• Best for large organisations (50+ employees) – The higher upfront investment can pay off over time for bigger teams that need robust, dedicated systems.
• Ideal for businesses needing high control – Complete oversight of hardware, security, and customisation makes this the preferred choice for companies with specific technical requirements.
• Suit industries with strict compliance rules – Sectors like legal, healthcare, or finance may benefit from keeping all data and call management on-site for regulatory reasons.

Hosted PBX:

• Great for SMEs and start-ups – Low setup costs and predictable monthly pricing make it budget-friendly for smaller teams.
• Supports flexible, remote working – Easy internet-based access enables staff to work from anywhere without sacrificing call quality or features.
• Quick and easy to scale – Adding or removing users is straightforward, allowing the system to adapt instantly as your team grows or changes.

Conclusion 

An on-premise PBX offers control, customisation, and independence from internet outages but requires significant investment and technical management. A hosted PBX delivers flexibility, easy scalability, and reduced maintenance but relies heavily on a reliable internet connection and your provider’s uptime.

Your decision should balance cost, control, scalability, and compliance requirements. Many UK SMEs find hosted PBX suits their flexibility needs, while larger firms often stick with on-premise for full control.

Summary Points 

• PBX systems route business calls internally and externally
• On-premise PBX = high control, higher upfront costs
• Hosted PBX = flexible, lower startup cost, provider-managed
• Internet quality is critical for hosted PBX success
• Industry regulations may influence your decision

FAQs

Q1: Can I switch from on-premise to hosted PBX later?
A1: Yes, many UK businesses migrate to hosted PBX when scaling or adopting remote work.

Q2: Is hosted PBX secure enough for sensitive industries?
A2: Yes, if your provider uses UK/EU-based servers, encryption, and GDPR-compliant policies.

Q3: How long does each system take to install?
A3: On-premise can take weeks; hosted PBX can be up in a few days.

Q4: Which is cheaper in the long term?
A4: On-premise may be cheaper over 7–10 years for large enterprises; hosted is cheaper upfront.

Q5: Can PBX integrate with other tools?
A5: Yes, especially hosted PBX, which often includes built-in CRM integrations.