The earnings of the head of the Student Loans Company are to be investigated after it emerged he was dodging tax, saving him "tens of thousands of pounds".
SLC chief executive Ed Lester has his £182,000 salary paid gross to his private service company, a Freedom of Information (FOI) request disclosed.
Chief Secretary to the Treasury Danny Alexander was said to be unaware of the arrangement although he was required to sign off Mr Lester's pay deal in common with all public sector salaries of more than £142,500.
He 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.
The Treasury will now review the tax affairs of a number of top civil servants after the Lester's tax avoidance antics were revealed on Thursday.
The arrangement, entered into in 2010, was disclosed in a HM Revenue and Customs (HMRC) letter to Exaro News and BBC Newsnight.
It is embarrassing for the coalition Government, which is committed to tackling tax avoidance.
Alexander added: "I have also written to my cabinet colleagues asking them to carry out an urgent internal audit to ensure that all senior consultancy appointments provide value for money.
"As I have said before, I believe everybody should pay the right tax at the right time and that is why I've taken this action."
A source said Alexander, one of the most senior Liberal Democrats in the government, instinctively felt this kind of arrangement was not appropriate in the public sector and strongly believed that tax avoidance was "wrong".
Tory backbencher Richard Bacon, a member of the Commons Public Accounts Committee, said he was "concerned" HMRC had even approved the arrangement.
"It is simply inappropriate for a full time civil servant and accounting officer for the Student Loans Company to be paid gross of tax through a personal services contract," the MP said.
"My understanding is that this arrangement saves Lester tens of thousands of pounds each year, some of which would otherwise be paid in income tax."
A Treasury spokesman said Alexander had approved Lester's pay, though reduced by about £13,000, in continuation of terms already agreed on a previously interim basis.
"The Chief Secretary to the Treasury is required to approve senior civil service appointments where the salary exceeds £142,500," he said.
"Terms and conditions are negotiated by the appointing department, and presented to the Chief Secretary for approval of the salary level.
"In the case of the chief executive of the Student Loans Company, the Chief Secretary approved the overall pay, at a reduced rate and in a continuation of the interim arrangements previously agreed.
"The Chief Secretary was not made aware of any potential tax benefit to an individual."
Departments have been told that any appointments which do not provide value for money should be unwound "as quickly as possible", the spokesman said.
The SLC released a statement on Thursday saying the company "followed all government guidelines on the appointment and remuneration" of Lester.
"He was offered this post after a solid performance as Interim CEO, where his leadership led to considerable improvement in the company's overall performance."
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