Prisoners whose convictions are quashed on legal technicalities will no longer be able to claim compensation for their time behind bars.

The cut was announced by Charles Clarke as part of package to save £5 million a year of taxpayers' money which will be diverted to make more generous payments to victims of crime. The move was criticised by human rights groups as "robbing Peter to pay Paul".

The Home Secretary has introduced a £500,000 cap on payments to the victims of genuine miscarriages of justice. This is less than a quarter of the £2.1 million maximum paid under the existing system.

The Home Office has accepted that it could be entering a minefield. A ministerial review has been launched to establish a legal framework to distinguish between wrongful convictions which are eligible for payments and those which are not.

"This is a grey area and it's a question of where we draw the line," said a Home Office spokesman.

He explained that if a prisoner automatically appealed against his conviction on a technicality and was freed on the first appeal, it was unlikely that he would be able to claim compensation because such vindication represents the normal working of the appeals process.

This overturns a discretionary award scheme set up by the former Home Secretary Douglas Hurd in 1985 and which Mr Clarke today described as "anomalous". It is expected to save around £2 million a year.

However, a prisoner released when a new piece of evidence - such as DNA - comes to light is likely to remain entitled to a payout. This statutory scheme, which is enforced under European human rights law, results in payments totalling £6 million a year.

Mr Clarke said he planned to bring in new laws so that compensation could be reduced to zero because of previous criminal convictions. The measure is designed to prevent criminals freed on a technicality from profiting from their incarceration.

He said: "The changes I have announced today will create a fairer, simpler and speedier system for compensating miscarriages of justice.

"The discretionary scheme has become increasingly anomalous and I do not believe that this can continue to be justified. These changes will save more than £5 million a year which we will plough back into improving criminal justice and support for victims of crime."

Average final awards for wrongful conviction have increased from about £170,000 in 2003-4 to more than £250,000 in 2005-6, according to Home Office figures. In comparison the average award to a victim of crime is just £5,000.

Explore Law

• Columnists

• Law Panel

• Law Reports

• Student Law

Times Recommends

• The best legal yarns this Christmas
• Legal school 'earned £1m by exploiting bar course'
• Axe may fall on 5,000 more City lawyers