The head of a public body will no longer be able to use a legal loophole to avoid thousands of pounds in tax, while local councils must reveal whether their employees are using the same loophole, the government said on Friday.
The announcements come as ministers scramble to respond to press revelations that dozens of senior public sector figures were legally reducing their tax bills by receiving their pay through limited companies.
The issue has proved an embarrassment after government promises to crack down on tax avoidance.
David Bott, who reportedly earns £235,000 a year as innovation director at the Technology Strategy Board, was one of those paid through a private company but will now be charged tax and National Insurance at source, said a spokesman for the Department for Business, Innovation and Skills.
"With immediate effect, David Bott's tax and National Insurance will now be deducted from payroll, in line with other senior executives in the organisation, and in line with the requirements set out by the Chief Secretary to the Treasury (Danny Alexander)," a department spokesman said Friday.
A furore over the pay deals began two weeks ago when the BBC reported that Ed Lester, chief executive of the Student Loans Company, had his £182,000 salary paid to an arm's-length company. He was technically hired as a "consultant".
Press reports estimated the arrangement, which began in 2010, could have saved him £40,000 in tax.
Lester was subsequently added to the staff payroll and the Treasury launched a review of the practice at national level.
The Department of Health was forced to apologise after news on Wednesday that 25 of its senior staff with salaries totalling more than £4 million had similar arrangements.
Most had set up one-person companies apparently just for tax purposes, the Guardian reported.
Local councils will have to reveal whether their staff are using such companies under guidance published by Communities Secretary Eric Pickles on Friday.
A spokesman for the Department for Business, Innovation and Skills meanwhile highlighted that genuine consultants are sometimes hired to provide specialist skills for "an interim period of time".
On Thursday Jonathan Baume, general secretary of the First Division Association representing senior civil servants, said that secretive pay deals must end but that departments would have to pay higher salaries to compensate.
"What we have found is that in certain cases, because the market rate was so much greater than the salary that would have been offered in the civil service, various deals were being done and some of those are now beigng exposed."
He said it was time to "grasp the very difficult political nettle, which is to address the problem of pay at senior levels of the civil service... Ministers are going to have to raise the salaries."
Source: AFP European Edition