Outcry as ministers sign off £182k pay deal without tax deductions

Mr Lester's controversial tax deal was signed off by Universities minister David Willetts

An urgent review has been ordered into the salary arrangements of Britain's top public officials after it emerged last night that the head of the Student Loans Company has been paid his £182,000 package without deductions for tax.

The special arrangement was sanctioned at ministerial level and has the potential to save the official, Ed Lester, tens of thousands of pounds. The revelation instantly sparked an urgent review of the contracts of other top public officials amid fears that the practice could be more widespread.

There is no suggestion that Mr Lester (inset) has done anything illegal. Appointed chief executive of the Student Loans Company in December 2010, he is paid his £182,000-a-year through a private firm he has established – rather than being paid as an employee. It means he can avoid paying tax on thousands of pounds worth of expenses.

However, the disclosure appears to undermine Coalition pledges to crack down on tax avoidance in the private sector, and open ministers up to allegations of double standards.

It is not known how many other public-sector employees employed by the Government have similar arrangements. However, a Government source said: "I would be surprised if he was the only one."

The terms and conditions of the contract were negotiated by the Department for Business, Innovation and Skills and the final salary was signed off by Danny Alexander, Chief Secretary for the Treasury.

Documents obtained under Freedom of Information laws by journalist David Hencke of Exaro News show that it was signed off at the Business Department by Universities Minister David Willetts before being passed on to Mr Alexander for approval.

Mr Alexander sliced £13,000 off the salary – but was not aware of the terms and conditions of the contract, he said. "I have asked Treasury officials urgently to review the appropriateness of allowing public sector appointees to be pauid through an agency by a personal service company.

"I have also written to my Cabinet colleaguers asking them to carry out an urgent internal audit to ascertain that all senior consultancy appointments provide value for money. As I have said before, I believe everybody should pay the right taxes at the right time and that is why I have taken this action."

A spokesman for the Treasury said Mr Alexander had now set up an urgent review of "the appropriateness of allowing public-sector appointees to be paid through an agency by a personal service company" – as happened in Mr Lester's case.

Any salary above £142,500 a year has to go before the Chief Secretary for approval but details of any terms and conditions are not provided.

A spokeswoman for BIS said: "Terms and conditions were negotiated by the SLC and BIS and presented to the Chief Secretary of the Treasury for approval of the salary level. Details of the arrangements were transparent throughout, including through published accounts. Personal taxation arrangements are a matter for the individual."

Last night Mr Lester was unavailable for comment.