Top civil servants who are dodging tax by paying themselves through a company are to face the sack unless they agree to pay up in full.
An inquiry ordered by Treasury Chief Secretary Danny Alexander has found more than 2,000 Whitehall civil servants and quango chiefs benefit from pay deals that allow them to slash personal tax bills.
Mr Alexander now plans to launch a crackdown which will include dismissal for any of these tax avoiders if they fail to pay their income tax in the normal way within three months.
The inquiry was ordered after it was revealed that Ed Lester, boss of the Student Loans Company, was avoiding tax by paying himself through a private company.
Mr Alexander disclosed the scale of the tax avoidance and his plans to stamp it out in a letter to Chancellor George Osborne, seen by Sky News.
Treasury insiders have told Sky News they were surprised at the high number of civil servants and quango bosses avoiding tax in this way.
Under the proposed crackdown, 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 (NI) in full. If they are unable to, they will be sacked.
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 wrote.
"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.
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, dated last week and inviting responses by May 3, he also suggested some details of the findings of the review should be published.
Although the 2,000 cases uncovered by the Treasury inquiry do not include local government officials, town halls have been told to adopt a similar approach and the Treasury also wants it extended to the NHS and the school system.
Treasury sources insist the Government has acted swiftly to deal with the tax dodging after Mr Lester's arrangements were revealed.
"This went on under Labour, who saw nothing wrong with it, which is typical of their approach to tax fairness," said an insider.
"We are wasting no time finding out the scale of the problem and dealing with it."
The extent of the use of the contracts also surprised the chairwoman of the Commons public accounts committee, Labour MP Margaret Hodge.
"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."