'Tax avoiding' pay deals may be rife throughout Whitehall

The controversial practice of paying senior officials' salaries into limited companies – potentially reducing their tax bills – could occur right across Whitehall, it emerged last night.

A review into the arrangements was ordered by the Treasury following the disclosure two weeks ago that Ed Lester, the chief executive of the Student Loans Company, enjoyed such a deal.

It emerged yesterday that 25 "contractors" are paid in the same way at the Department of Health (DoH), which it justified on the grounds they were not civil servants. The Treasury has contacted every director of finance for Whitehall departments, as well as arms-length agencies, to ascertain whether they have struck such deals with top officials. A Government source indicated he believed similar arrangements – many stretching back years – would be uncovered in several ministries. He told The Independent: "We fully expect to find other cases beyond those reported so far."

HM Revenue and Customs could also investigate the arrangements as it is illegal to set up a limited company simply to avoid tax. Labour wrote to Cabinet ministers calling on them to come clean over whether their officials benefited from such schemes.

Jonathan Baume, the general secretary of the First Division Association, which represents senior civil servants, argued the furore proved that pay for senior staff needed to be increased to stop the secretive deals. He said the problem dated from Labour's last years when ministers wanted to attract top individuals from the private sector but could not offer them matching salaries. "We now need to be very transparent and very clear this cannot continue, but at the same time grasp the very difficult political nettle, which is to address the problem of pay at senior levels of the civil service. Frankly, it's a shambles," he said.

The arrangements at the DoH were exposed in leaked documents showing 25 staff were, between them, paid £4.2m into limited – or service – companies, many registered at their home address. Two months ago the department insisted in a written parliamentary answer that it did not allow "payments to civil servants by way of limited companies".