The Office of Fair Trading (OFT) is to pay up to £100,000 for tip-offs leading to action against price fixing and other anti-competitive behaviour.
Collusion on prices can lead to heavy fines and prison sentences
The new policy of financial incentives for information will initially run for 18 months and is similar to a scheme in South Korea.
A business found to be part of a cartel can be fined up to 10% of its turnover.
The move follows an OFT campaign offering immunity for UK firms that blow the whistle on cartels.
"Cartels are very damaging both to businesses and consumers and they are usually conducted in secret making them hard to detect," said Simon Williams, OFT senior director of cartels and criminal enforcement.
"Cartels are not the preserve of big business."
The Competition Act prohibits cartels, with businesses facing the 10% fine if they are proved to be colluding. Individuals can also face up to five years in prison and an unlimited fine under the Enterprise Act.
Cartels can involve price fixing, market sharing, limiting production, or rigging who might win a contract on projects.
The policy will run for 18 months, before the OFT makes a decision on whether to make it a permanent feature.
It said rewards would only be paid when information was accurate, verifiable, and useful for anti-cartel enforcement work.
The amount paid would be set by an OFT formula and would be non-negotiable.
But Mr Williams said he expected "a healthy debate over what is a fair amount".
In November 2005, OFT research suggested one in four small businesses had been a victim of anti-competitive behaviour.
It launched a campaign offering UK firms that admitted taking part in such practices partial or total immunity from fines.
Mr Williams said the reward scheme, inspired primarily by other law enforcement tip-off schemes in the UK, had been discussed for a year to run alongside the whistle-blowing campaign.
He said the leniency project had been running for some time. Each busted cartel deterred another three or four, he claimed, and any amount paid out in rewards would be smaller than the financial benefit to consumers of breaking cartels.
Last year British Airways was fined £121.5m by the OFT and $300m by the US Department of Justice for colluding with Virgin on the level of fuel surcharges that would be added to their ticket prices.
Virgin escaped the fines because it had informed the authorities that the breaches had happened, but both reached an agreement in February on refunding passengers.
Asda, Dairy Crest, Safeway, Sainsbury's, The Cheese Company and dairy firm Wiseman, have admitted anti-competitive practices in fixing dairy prices and agreed to pay fines totalling £116m.