More than 2,000 senior public officials benefit from controversial pay deals that allow them to slash personal tax bills, an official review has revealed.
The extent of the practice has taken ministers by surprise and led to threats to cut the budgets of Whitehall departments that fail to prevent it happening.
Treasury Chief Secretary Danny Alexander set out the figures and plans for a crackdown to Cabinet colleagues in a letter obtained by investigative news website Exaro. Under the new Treasury rules, all those on six-month-plus "off payroll" contracts earning in excess of £220 a day will have to prove they are paying income tax and National Insurance in full.
Due to be in force within three months, the regime will also include sanctions for non-compliant departments and agencies, including budget cuts of up to five times the salaries concerned.
"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," Mr Alexander told the Cabinet. "Departments have provided the Treasury with information in relation to all individuals engaged off-payroll - for payment in excess of £58,200.
"Of more than 2,000 such people identified, 1,500 are paid more than £380 a day. At least 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 of them have been working for at least two years."
While it would be disproportionate to ban all such contracts in future, there had to be "strict rules" on the tax arrangements of senior public officials, he said.
The review was launched after it was revealed in February that the head of the Student Loans Company was paid via a company without tax being deducted, saving him tens of thousands of pounds. Mr Alexander moved swiftly to end the arrangement and promised to "unwind" similar deals.
The Treasury said it did not comment on leaked documents and the review was going on.
Revelation of such deals was embarrassing for the coalition, which has been mounting a high-profile campaign against tax avoidance. But a senior source said: "This went on under Labour, who saw nothing wrong with it, which is typical of their approach to tax fairness. We are wasting no time finding out the scale of the problem and dealing with it."
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