I can strongly recommend paint.NET, having used it myself for several months, as a free alternative to PaintShop and a huge improvement on Windows Paint (which it has been designed, as an academic project overseen by Microsoft, to replace).
Layering and advanced effects are available, yet it is simple enough for Key Stage 2 pupils to use, for example to add effects to photos. I particularly like the semi-transparent tools which activate when you hover over them.
Download from: http://www.getpaint.net/index2.html (link updated 16/12/06)
Helen