Treasury Chief Secretary Danny Alexander will be grilled by MPs on why the head of the Student Loans Company (SLC) is being paid via a company without tax being deducted.
SLC chief executive Ed Lester is said to save tens of thousands of pounds in tax by having his £182,000 salary paid gross to his firm.
The arrangement, entered into in 2010, was disclosed in an HM Revenue and Customs (HMRC) letter obtained under the Freedom of Information Act by Exaro News and BBC Newsnight. The revelation is embarrassing for the coalition, which has been mounting a high-profile campaign against tax avoidance.
Mr Alexander is said to have been 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. The minister is understood to have insisted the package was reduced by £13,000 when the interim appointment became permanent in January last year.
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." A source said the Liberal Democrat instinctively felt this kind of arrangement was not appropriate in the public sector.
An urgent question tabled by Labour backbencher Nick Brown in the Commons on Thursday demands "a statement on the Government's policy on use of tax avoidance devices by Government departments and public servants".
The Student Loans Company insisted it had followed "all Government guidelines" over the chief executive's pay. "Ed Lester accepted the position as permanent chief executive and accounting officer to the Student Loans Company on a two-year contract, which was formally announced in December 2010," a spokeswoman said.
"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. SLC followed all Government guidelines on the appointment and remuneration of the CEO."
Tory backbencher Richard Bacon, a member of the Commons Public Accounts Committee, said he was "concerned" that HMRC had 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 Mr Lester tens of thousands of pounds each year, some of which would otherwise be paid in income tax."