Spending on compensation paid to those wrongly convicted of crimes in England and Wales is to be cut by £5m a year, Home Secretary Charles Clarke has said.
Angela Cannings is still waiting for compensation
Those who win their appeals at the first attempt will get no compensation. Others who may have spent years in prison will see any pay-outs capped.
Individual awards will be limited to £500,000 to bring them in line with the maximum amount paid to victims.
Campaigners say the cut ignores the impact of wrongful convictions.
The Home Office said anyone who has already submitted an application for compensation would still be entitled to a payment under existing measures.
It said the highest payout given to the victim of a miscarriage of justice was £2.1m, with average compensation being about £250,000.
A discretionary compensation scheme, introduced in 1985, which paid out £2m a year would be scrapped because it had become "increasingly anomalous", Mr Clarke said.
Scrapping the scheme means people will not be allowed compensation if their cases have been quashed while going through the normal appeal process - winning at the first attempt.
They would, however, be able to apply for compensation through the civil courts.
New limitations will also be placed on claimants under a statutory scheme - which will remain in force - which currently pays out £6m a year.
The Home Office said the changes were intended to speed up payments, which currently can take between five and ten years to be finalised.
DISCRETIONARY SCHEME CRITERIA
Person eligible to apply if found to be wrongly convicted
Upon application, Secretary of State makes a decision and appoints assessor
Amount paid for "suffering and harm to reputation" judged by factors including:
i) Seriousness of offence and severity of punishment
ii) Conduct of investigation and prosecution of the offence
Source: Criminal Justice Act 1988
Under the proposals, the level of payments to people with previous convictions would be reduced.
"The changes I have announced today will create a fairer, simpler and speedier system for compensating miscarriages of justice," Mr Clarke said.
"These changes will save more than £5m a year which we will plough back into improving criminal justice and support for victims of crime."
Mr Clarke also announced an "urgent" ministerial review of the legal test used by the Court of Appeal to quash criminal convictions which, he said, could lead to a change in the law.
He said the review would look into "what extent an error in the trial process necessarily means a miscarriage of justice".
Mr Clarke said changing the test used by appeal judges would be a "radical" move and one option would be to allow courts to declare that a case was "not proven".
The changes to the discretionary award procedure would rule out damages being awarded to someone like Angela Cannings, who was wrongly convicted of killing two of her sons.
She served 20 months in prison for murder before her convictions were overturned on her first appeal in 2003.
Her solicitor Bill Bache told BBC News the proposals did not recognise the impact of miscarriages of justice on people's lives.
"Simply because the perpetrator of the injustice against one group of people is the state as opposed to say a criminal in the street or something of that kind, why should there be a distinction between those two?"
Gerry Conlon, who was wrongly jailed for the 1974 Guildford pub bombings, said the changes were unacceptable.
"This is not something where you spend 15 years in jail and then walk out and continue a normal life," he told BBC News.
"Lives have been ruined, lives are in tatters and we need help."
Paddy Hill, one of the Birmingham Six, who wrongly served 16 years in jail for IRA bomb attacks, said he was "very angry".
"In today's society there's every possibility to be a victim of crime but you don't expect to be a victim of miscarriage of justice," he said.
Mr Hill is a founder of the Miscarriages of Justice Organisation, a charity, dedicated to promoting changes in the legal system.
Shadow Home Secretary David Davis said both victims of crime and those who have suffered a miscarriage of justice should be compensated in a "fair fashion" that reflects the impact of their suffering.
"In the case of a miscarriage, the need is overwhelming because it is the state that instigated proceedings in the first place," he added.
Liberal Democrat home affairs spokesman Nick Clegg called on the government to retain the discretionary power to provide compensation on a case-by-case basis.
Sally Ireland from Human rights group Justice said the proposal "smacks of robbing Peter to pay Paul".
"To disqualify people who may have spent many months in custody from the scheme is a cynical attack on people who have already suffered enough at the hands of the state," she said.
The Miscarriages of Justice Support Service, run by Royal Courts of Justice Citizen Advice Bureau, has also voiced concern at the plans.
It said people cleared typically leave court with a grant of £50 and need to wait about nine months to hear if they are eligible for compensation.
"Putting an artificial cap on the amount to be paid out ignores the real life impact experienced by those suffering a miscarriage of justice," said the service's director James Banks.
Yes, of course these payments should be cut, and eventually abolished. We are all responsible for our lives and if we've been wrongly imprisoned and have lost everything as a result, it is up to us as resourceful individuals to hold our heads high and rebuild our lives through our own efforts and not continually rely on the taxpayer to bail us out.
Mr Jangles, Milton Keynes, UK
This is outrageous! Anyone who has spent time in prison - around 2 years in most cases - will have seen their lives destroyed, and now to hear that they will not be compensated will simply add to the injustice. Apparently, under this Government, it's YOUR fault if you are wrongly convicted !
T. Hedley, Sheffield, UK
As a lawyer it is clear to me that the state has a greater duty to compensate those it has directly harmed by bringing prosecutions which result in unsafe convictions under rules set by the state than it does to those the state indirectly harms by failing to provide adequate policing, detection and prevention of crime and sentencing for convicted criminals to prevent them suffering damage at the hands of criminals.
This is the way justice works in our country - there is a jury of members of the public, who decide guilt based on the evidence. If the evidence was good enough to convince them, then why should compensation be due? Compensation should only be for negligence or malice. If evidence was falsified then, yes, you have a case for compensation, but otherwise it is a small risk of having an open justice system.
Jon M, Reading, UK
The government wants to bring in line compensation so they can give more to victims. This seems to be ignoring the fact people who have had their lives ruined by miscarriages of justice are victims.
Anthony Rose, Manchester
This is another policy that attempts to paper over the cracks caused by our justice system. Wrongly convicted individuals are placed in horrendous conditions, suffer terrible psychological damage and at the end of it if they have been wrongly convicted they are now going to get robbed of any decent compensation. This policy is clearly short sighted.
Paul Delaney, Bellshill, Lanarkshire
This is absurd and an outrage! Victims of miscarriages of justice ARE victims of a crime: the most appalling form of criminal negligence and legal malpractice, with the state as perpetrator!
Rog, Amersham, UK
The problem is that the victims of crime are paid too little to start with! If I earn 100K per year and lose my job because of a wrongful conviction why should I spend years trying to get adequate compensation when I have been left penniless (possibly lost my home) through no fault of my own? Surely compensation is designed to ensure that the authorities do their utmost to ensure that it should hardly ever be payable for miscarriages of justice.
Mark, Ashbourne, UK