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."
Mr Alexander said it should be "a priority to put in place strict rules which ensure that the tax arrangements of the most senior public sector appointees are not open to question".
Off-payroll contracts should only in future be used in "exceptional" cases - such as IT specialists brought in on short-term projects - and last less than six months, he said.
And anyone on them - including existing deals - should be required to give assurances they are paying tax and NI in full or have their contracts terminated.
In the letter he also suggested some details of the findings of the review should be published.
Town halls have been told to adopt a similar approach and the Treasury also wants it extended to the NHS and the school system.
A crackdown announced in the Budget on the use of personal-service companies to avoid tax is not due to come into force until next year and would not cover all off-payroll contracts.
The extent of the use of the contracts also shocked chair of the Commons public accounts committee Labour MP Margaret Hodge.
She told Exaro: "I am absolutely shocked that what was seen as a rogue case appears to be commonplace across the whole of the civil service.
"Danny Alexander has promised that our committee will receive a full report and we intend to interrogate vigorously the worst offenders.
"It does appear that he is taking the right steps to deal with this."
Jonathan Baume, general secretary of the First Division Association (FDA) which represents high-ranking civil servants, said it was "unethical" for senior managers in the civil service to have such pay deals.
But he said there were serious questions to be asked about whether pay levels and "crude" efforts to cut the Whitehall wage bill had contributed to the wide use of such arrangements.
"I do not think it justifies that. I think it highlights the fact that there is an issue about where we set pay levels," he told BBC2's Newsnight.
"Recently we have had a rather crude approach to recruitment bans and recruitment freezes and people have tried to get round it.
"So we need to be intelligent about this but you should not be holding a senior management role and getting paid in this way - it is just unethical.
He said he found it "disturbing" that some people had enjoyed the potential tax break for long periods.