Raising payroll tax will do nothing to help struggling companies and could lead to job losses and a prolonged recession, business leaders warned yesterday.

Finance Minister Paula Cox announced a hike for standard payroll tax from 14 percent to 16 percent in yesterday's Budget — an increase to be shared equally between employers and employees. The same two percentage point increase will apply to other payroll rate categories.

The Deputy Premier also raised the salary cap for payroll tax. Previously, income above the first $350,000 was not subject to tax but Ms Cox more than doubled the threshold to $750,000.

She said the revised rate structure for payroll tax would yield $427 million in the coming financial year. The amount represents more than 40 percent of the Government's expected revenue for 2010/11.

"Although the public may not wish to pay more for the increased public services they desire, it is incumbent that we have a tax model that does not perpetuate spending without an increase in the revenue stream," she said.

"The impact on the salary and wage packets will be one additional dollar of tax per every $100 of taxable renumeration."

Employers had urged the Minister not to increase the tax burden on businesses and reacted with dismay to the news.

Graham Redford, president of Bermuda Employers' Council, said: "While we recognise Government's desire to raise revenue to pay for its operations, we are disappointed that employers are being burdened with an additional one percent increase in payroll tax.

"Many employers are facing cost challenges already and this increase will only add to those challenges. There will also be additional pressure placed on employers from employees seeking pay rises to offset their one percent tax increase. The payroll tax increase will not stimulate business and employment and may well prolong our economic downturn."

Chamber of Commerce president Stephen Todd said: "It could have an effect on employment in the coming months and the coming year."

He said employers had to raise enough revenue to meet operating costs and could be forced to reduce manpower if that wasn't possible. "We believe it's going to have an impact on the retailers, specifically, and businesses in general," he said of the payroll hike.

Mr. Todd said the rise represented a 14 percent increase in standard payroll tax at a time when businesses were finding it difficult to maintain a presence on the Island. "That's significant, especially in these particular economic times," he said.

Mr. Todd added that Government should be tightening its own belt rather than targeting employers and employees for revenue.

He said the increases wouldn't make Bermuda a less attractive proposition for overseas firms. But he added: "Where it hurts more specifically is the man in the street. The man in the street is going to feel more of a pinch in their pocket than those on the higher end of the earning income scale."

Cheryl Packwood, from Bermuda International Business Association, said of raising the salary cap: "The people that are going to be making more than $350,000 is going to be a very limited amount of people."

She said of the payroll hike: "It's never welcomed. Nobody's going to be jumping for joy. But I can't imagine that it's the end of the world."

Peter Everson, chairman of the Chamber of Commerce's economics committee, had a different view. "What it means is the costs of operating a business in Bermuda will increase by a minimum of one percent and, for some companies [which pay the employee contribution], two percent.

"Realistically, the employees will be seeking to get extra compensation where they can because their take-home pay will have gone down. For many people, the cost of living is already stretching them. It just makes Bermuda less competitive compared to other competing jurisdictions.

"For Bermudian businesses, who are all struggling, it's very harsh because they have such tiny profit margins, as you can see with the closure of businesses in St. George's."

Kirby Brackstone, a small-business owner in St. George's and chairman of the east end division of the Chamber of Commerce, said: "Any payroll increase is never going to be good for small businesses, who really are the engines of the economy and employ lots of people.

"It's a disincentive to hire when employers' costs begin to rise. I understand why they had to do it but the bigger picture is it doesn't generate jobs and jobs are what keep people off the streets."

A Pembroke retailer, who asked not to be named, said: "It just makes life overall harder. Our sales have dropped. If we don't have the money coming in, it can't go out. It's an increase on my payroll tax which I can't really afford at this time, having cut our staff down to a minimum."