Ed Lester to pay income tax and national insurance at source as ministers come under fire for signing off salary arrangements

Danny Alexander, the chief secretary to the Treasury chief, has come under intense Labour pressure to say whether any minister had been aware they were signing off a tax avoiding scheme for Ed Lester, the head of the Students Loans Company (SLC).

Alexander and the business department, responsible for higher education ended the arrangement on Wednesday, saying Lester would in future pay tax and national insurance on his £182,000 pay package at source, rather than being paid via a private company without paying any tax.

Alexander repeatedly told the Commons: "I was not made aware of any tax benefit made available at the time I was asked sign off the arrangement." He said his responsibility was to sign off any salary levels above £142,500, and to make any adjustments to that size.

The news had come as an embarrassment at a time when the government is trying to crack down on executive salaries in the private sector.

He said the details of the contract were the responsibility of the Students Loans Company and the business department.

He was answering an urgent question tabled by Nick Brown, the MP for Newcastle upon Tyne.

Alexander, who has launched a Whitehall review, provided some reassurance about the pervasiveness of the practice, saying: "I can tell you in relation to the 180 appointments with salaries of £142,500 that I have approved myself in my time as Treasury chief secretary, this is the only one, so far as I am aware, having looked through the cases where any similar arrangement applies.

He added that this did not include arrangements that were made before his appointment or at salary levels below the £142,000 threshold. He said the review would look at this issue

David Willetts, the higher education minister, is the figure most likely to have been aware of the arrangement, but it is not yet known whether he was informed by civil servants of its details.

Earlier, the business secretary, Vince Cable, defended the SLC chief executive, saying Lester was "an exceptionally useful individual who has helped to turn round that organisation".

"The arrangements under which the negotiations took place involved substantial value for money for the taxpayer, a tax cut by the individual and we will pursue matters of public concern on the tax issues," Cable said.

Alexander has written to other Whitehall departments, including accounting officers, to ask whether public servants had been given similar tax arrangements.

He has also asked whether any such arrangements were put in place by the Labour government and why HM Revenue & Customs (HMRC) had sanctioned the arrangement, a point that is now likely to be investigated by the public accounts committee.

Angry MPs called for the review to be widened to include the level and nature of salaries paid to NHS executives as well as bonus payments being paid to the chief executive of the Child Support Agency.

Labour MP Gareth Thomas raised questions about why written answers provided to him by the Department for Business, Innovation and Skills failed to highlight the arrangement.

Lester was appointed SLC chief executive in December 2010 and is paid £182,0000 a year through a private firm he has established rather than being paid directly.

Alexander confirmed that the former head of the civil service, Lord O'Donnell, had been aware of the arrangement.

Richard Bacon, a prominent member of the public accounts committee, said there has been too much of this going on, pointing to a similar case at the Rural Payments Agency (RPA) under the previous government.

Alexander said he was not aware of the RPA example and promised he would continue to take strong steps to crack down on tax avoidance.

The PAC chairwoman, Margaret Hodge, urged Alexander to publish a complete list of public servants paid by companies when the review is completed in March.

She wanted details of why HRMC had sanctioned the arrangement, and the decision for government to contribute to his pension.