An urgent review has been ordered into the tax affairs of top public officials after it emerged last night that the head of the Student Loans Company (SLC) has been paid his £182,000 package without deductions for tax.
The special arrangement was sanctioned at a 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 tax affairs of other top public officials amid fears that the practice could be more widespread.
Mr Lester, who was appointed chief executive of the Student Loans Company in December 2010, is paid his £182,000-a-year through a private firm he has established – rather than being paid directly.
The disclosure appears to undermine Coalition pledges to crack down on tax avoidance in the private sector and to expose ministers to allegations of double standards. Mr Lester's use of a private company means his earnings can potentially be charged via corporation tax rather than income tax, meaning he would pay a much lower rate, and avoid paying tax on thousands of pounds worth of expenses. There is no suggestion that he has done anything illegal.
It is not known how many other public-sector workers employed by the Government at arm's length have similar arrangements. However, a Government source said: "I would be surprised if he was the only one." Last night the Tory MP Richard Bacon said a full investigation was needed into how many public servants were being paid salary without tax deductions.
Liam Burns, President of the National Union of Students, said that public servants using tax avoidance tactics while students were facing higher tuition fees was unacceptable.
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 Chief Secretary for the Treasury, Danny Alexander.
Documents obtained under Freedom of Information laws by the journalist David Hencke of Exaro News show that it was signed off at the Business Department by the Universities Minister David Willetts before being passed on to Mr Alexander for approval. Mr Alexander did slice £13,000 off the salary – but he said he was not aware of the terms and conditions of the contract.
Mr Alexander said: "I have asked Treasury officials to urgently review the appropriateness of allowing public-sector appointees to be paid through an agency by a personal service company. I have also written to my Cabinet colleagues asking them to carry out an urgent internal audit to ascertain that all senior consultancy appointments provide value for money. I believe everybody should pay the right taxes at the right time and that is why I have taken this action."
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 made known to him.
The review will look at whether schemes like this should be outlawed – and whether more detail should be supplied to the Chief Secretary about conditions before he approves a salary.
In emails seen by the BBC, SLC officials argued that – over the two-year period of the contract – employing Mr Lester through his personal company would cost less than adding him to the payroll.
A spokeswoman for the Department of Business said: "Terms and conditions were negotiated by the SLC and the Department of Business and presented to the Chief Secretary of the Treasury for approval. Details of the arrangements were transparent throughout. Personal taxation arrangements are a matter for the individual."
Mr Lester was unavailable for comment.
Corporation tax: How it works
Most people have their wages paid straight into their bank account as a salary, with income tax and national insurance deducted. The advantage of having your earnings paid to a personal service company as a fee, with you then receiving your income from the company in the form of a dividend, is simple.
It means the company would pay corporation tax on the sum at a flat rate of 21 per cent, instead of up to 50 per cent under income tax. It also allows you to deduct non-taxable expenses from the fee, meaning the amount of money being taxed is lower. For someone earning £180,000 a year, it was estimated last night that these arrangements could leave them as much as £40,000 better off.