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This cross-sequential study investigated the development of phonological recoding in working memory in relation to literacy acquisition in children between the ages of 5 and 8 years. Using a paradigm which manipulates visual and phonological similarity of visual stimuli, it has shown that phonological recoding consists not only of the ability to access the phonological representation of the visual stimuli, but also the capacity to inhibit the visual representation which might cause interference. In relation to literacy acquisition, the ability to access the phonological representation is a unique predictor of literacy acquisition over and above that accounted for by age, intelligence and working memory capacity. It accounts for up to 25% of the variance on a Neale Analysis of Reading test and up to 18% of the variance on the WRAT single word reading test. However, from the age of 7 years and above, the capacity to inhibit the visual response also plays a major role, accounting for a further 10% of the variance. Children of this age who are still relying on visual strategies in working memory have significantly lower literacy attainment levels. There was no significant relation between phonological recoding and maths scores until the age of 8 years, showing that a separable cognitive processing component has been isolated.