Nadhim Zahawi’s dismissal comes after a probe into his tax affairs found a serious breach of the ministerial code.
“Following the completion of the Independent Adviser’s investigation – the findings of which he has shared with us both – it is clear that there has been a serious breach of the Ministerial Code,” Sunak said in a letter to Zahawi on Sunday.
“As a result, I have informed you of my decision to remove you from your position in His Majesty’s Government.”
The independent ethics adviser Laurie Magnus found that Zahawi had been misleading when he said that reports last July over his tax affairs were “clearly smears”.
Zahawi did not correct the record until last week, when he said he had reached a settlement with the authorities.
“I consider that this delay in correcting an untrue public statement is inconsistent with the requirement for openness,” Magnus said in a letter to Sunak.
He added that Zahawi had shown “insufficient regard” for the requirement “to be honest, open and an exemplary leader through his own behaviour.”
“Mr. Zahawi’s conduct as a Minister has fallen below the high standards that, as Prime Minister, you rightly expect from those who serve in your government,” he said.
The tax issue relates to Zahawi’s co-founding in 2000 of opinion polling firm YouGov, in which he said his father had taken a stake to support its launch.
However, Britain’s tax office disagreed with the number of shares given to Zahawi’s father, when the issue was raised during his appointment as finance minister last year.
Zahawi said on Saturday he had paid dues and settled the matter with the tax office, which he said concluded that he had made a “careless and not deliberate” error. Zahawi reportedly handed over a fine for late payment worth £5m ($6.2m).
Sunak and his government had faced questions for several days about the row, with growing pressure on Zahawi to stand aside.
The opposition Labour party said Sunak should have fired Zahawi immediately when the allegations emerged in newspaper reports this month, rather than seeking to buy time by asking Magnus to investigate.
The scandal underlined that Sunak was a “weak” prime minister, senior Labour MP Bridget Phillipson told Sky News.
“The stench of sleaze just hangs around the Conservative Party,” she said.
Sunak has faced questions himself about his family’s tax affairs after it emerged that his Indian wife Akshata Murty had for years enjoyed “non-domicile” status, which shielded her from paying UK taxes on her overseas income from her family’s Infosys business group.