NSW Police Minister Mike Gallacher has resigned from cabinet after a corruption inquiry heard he hatched a "corrupt scheme" with Nathan Tinkler's property development group to receive illegal donations.

In a development that sent shockwaves through the Baird government, the Independent Commission Against Corruption heard on Friday that Mr Gallacher was intimately involved in setting up a scheme for Buildev to pay tens of thousands of dollars in illegal donations to a Liberal Party slush fund.

Mike Gallacher at a police parade in Goulburn this morning. Credit: Darryl Fernance

Premier Mike Baird said in a statement that he had accepted Mr Gallacher's resignation from the ministry.

"I make no judgement regarding those allegations. However, it could take considerable time for them to be resolved, and this would constitute an unacceptable distraction for my government," Mr Baird said.