Family charities and business associations have welcomed the move by the Government to reform the structure of the payroll tax system.

In yesterday’s Budget, Bob Richards, the Minister of Finance, told MPs that the Government was looking to bring tax relief for earners in the two lowest bands of wage ranges.

The initiative has been hailed as a “good start” by Sheelagh Cooper, chairwoman of the Coalition for the Protection of Children.

“It shows a willingness to begin to distribute the burden a little more evenly,” Ms Cooper said. “However, it should be noted that it is not really the graduated deductions that are crippling the low-income earners, it is the fixed deductions like social insurance and HIP.

“Take an employee who is making $15 an hour and is fortunate enough to work full time. In four weeks, the gross pay is $2,400. The employee’s portion of HIP plus social insurance is $388. This essentially means that employee works 25 hours before actually making anything.

“Admittedly, this is a difficult problem to solve unless one tackles the issue of what would be considered a living wage. We have addressed this in our submission to the select committee chaired by MP Rolfe Commissiong.”

Under proposals outlined by Mr Richards, the cap rate for tax for the highest earners, the maximum taxable salary level, will also increase from $750,000 to $900,000.

People earning $48,000 or less will see the tax rate fall from 6 per cent to 4.25 per cent by 2018-19 and those paid between $48,000 and $96,000 will see their tax rate cut from 6 per cent to 5.5 per cent.

But those earning between $96,000 and $235,000 can expect to see their payroll tax rate jump by a half, from 6 per cent to 9 per cent by 2018-19.

The biggest earners — those who take home between $235,000 and $900,000 — can expect a five-percentage-point rise from 6 per cent to 11 per cent over two years. Mr Richards said: “This is the most important part of the payroll tax reform and is the part that results in an increase in take-home pay for people who earn less than $137,143.

“Over three-quarters of the population earn below $137,143 and should benefit from a reduction of the employee’s portion of the payroll tax.”

Mr Richards told MPs that those in the lowest-paid category, where an employer is passing on the maximum amount of 6 per cent to an employee, will see a tax cut of up to $600 a year in 2017-18.

Those in the next band up, $48,000 to $96,000, will see their tax bill fall by between $600 and $720. The third category, earners taking home between $96,000 and $235,000, provides for a tax decrease of up to $720 for those earning less than $137,143 and allows for an increase of as much as $1,713 for those above. The highest earners will see an increase of $1,713 to $29,000.

“Employment tax on employers will also be affected using the same approach; that is, having the tax burden falling more on larger companies than on small business,” the minister said.

After yesterday’s Budget announcement, Kevin O’Donnell, chairman of the Association of Bermuda Insurers and Reinsurers, also backed the introduction of payroll tax “progressivity”.

Mr O’Donnell said: “Abir respects the Bermuda Government’s commitment to strengthening the Bermuda economy and reducing the debt to place the country on a firm financial foundation. Abir fully supports the introduction of payroll tax ‘progressivity’ — an applaudable effort to build some equity for taxpayers in the system, and right away.

“The change in overall tax rates is significant and, as with any major tax reform, should be introduced via a glide path over time so as not to cause a sudden increase in the payment of taxes by one or more sectors. In an increasingly connected world, every effort must be made to make sure Bermuda remains a competitive job market.

“Abir urges the Government to develop existing sources and new alternatives to the payroll tax as a means for raising revenues. Having a diverse revenue base will helpfully ease pressure on the payroll tax for everyone’s benefit. An overemphasis on the payroll tax makes Bermuda operations even more expensive than alternative insurance hubs.”