Thousands of civil servants paid via private firms to cut tax bills

Treasury to crack down after audit reveals that 'off-payroll' deals have become widespread

The Government is paying more than 2,000 senior public officials "off payroll", allowing them to avoid thousands of pounds in tax, it emerged last night.

Ministers ordered an audit of how top civil servants were paid after it emerged that the head of the Student Loans Company had significantly reduced his tax bill by being paid through a company he controlled rather than through the payroll.

It has revealed that the tax avoidance measure is being replicated across Whitehall by officials earning over £58,00 a year, according to a letter leaked to the investigative website Exaro.

Of more than 2,000 people identified, 1,500 are paid more than £380 a day, while 1,600 people have been working for their departments for more than six months. Of these, 1,200 have been working for in excess of a year and 800 for at least two years.

Danny Alexander, Chief Secretary to the Treasury, said the officials would have to prove they are paying their fair share of tax or lose their jobs. In a letter from Mr Alexander to the Chancellor George Osborne leaked last night he wrote: "The sheer scale of off-payroll engagements across government, and the length and size of these contracts, suggests that the scope for artificial tax minimisation may be greater than previously understood."

After it emerged in February that the Student Loans Company was paying its chief executive, Ed Lester, through his personal-service company, Mr Alexander ordered the Treasury to carry out a review.

He wrote in his letter of 25 April to Mr Osborne: "I do not believe that it would be proportionate to ban all such contracts in future." However he added he was seeking "strict rules" on tax arrangements of senior public officials. Mr Alexander continued that a consultation on the change will be published with the findings of the review.

Writing about new engagements and contract renewals, Mr Alexander said: "Board members and senior officials with significant financial responsibility should be on the organisation's payroll, unless there are exceptional circumstances, and such exceptions should exist for no longer than six months.

Mr Alexander is also asking Andrew Lansley, the Health Secretary, and Michael Gove, the Education Secretary, to apply the same rules throughout the NHS and non-state funded schools.

Margaret Hodge, chairwoman of the House of Commons Public Accounts Committee, said: "I am absolutely shocked that what was seen as a rogue case appears to be commonplace across the whole of the Civil Service.