Salaries totalling more than £4 million paid to 25 Whitehall advisers were made through limited companies, it has been reported.
The payment method, which allows tax bills to be reduced, was used for senior contractors employed by the Department of Health, according to the Guardian.
Officials apologised for any "misunderstanding" over the salaries after health minister Simon Burns told Parliament in a written answer last year that no Whitehall health staff were paid in that way.
The department has insisted the definition of staff referred only to civil servants and not the "contractors" involved.
Many of the 25 individuals, however, hold senior roles and have been employed by the department for a number of years, the Guardian said.
It comes after Danny Alexander, Chief Secretary to the Treasury, launched a review into the practice after it emerged the Department for Business, Innovation and Skills had allowed a similar salary deal to go ahead for Ed Lester, the chief executive of the Student Loans Company.
A Department of Health spokesman said: "The definition of 'staff' in this context refers to civil servants, and we can confirm that no civil servant who is an employee of the Department of Health is paid in this way. To this extent it was certainly not our intention to mislead anyone involved.
"We would be happy to clarify the situation in greater detail with anyone who asks and apologise for any misunderstanding involved.
"We are currently carrying out a full audit of such arrangements in line with the recently announced Treasury review of tax arrangements of public sector appointments."