The wages of 500 prisoners who work in communities are to be cut and used to support victims of crime, the Ministry of Justice says.
The 40% pay cut will raise up to £1m a year for victim support services.
The policing minister said the move, which comes into force on Monday, would make offenders take personal responsibility for their crimes.
Ministers also want to target the wages of prisoners working inside jails, through new legislation.
Under the Prisoners' Earnings Act, 40% of prisoners' wages over £20 per week after tax, National Insurance and any court-ordered or child support payments, will be deducted and given to Victim Support.
But the average wage of offenders working in prison is £10 a week, so many would not face the deduction.
Policing Minister Nick Herbert said: "For too long the financial burden of repairing the damage done by crime has fallen to the taxpayer alone.
"Making offenders pay financial reparation to victims will require them to take personal responsibility for their crimes and go some way towards making redress to victims through the funding of crucial support services."
The majority of work done by prisoners in England and Wales involves the packaging and assembly of food, electrical components and other products for outside companies.
Some inmates are involved in prison laundry or printing workshops and there are also examples of charities running businesses within prisons, such as The Clink Restaurant at High Down in Surrey.
Prisoners eligible to work in the community would be those classified as "low risk" and nearing the end of their sentences in open prisons, according to the Howard League for Penal Reform. Mostly male, they are said often to work for firms in the decorating and construction sectors.
But Frances Crook, Howard League chief executive, suggested the deductions may now discourage inmates from working in the community before they are released.
"The proposals risk taking away the incentive for this group to work as they already pay tax and inevitably pay substantial travel costs to and from work, while the new bureaucracy will be burdensome for the businesses employing them on the outside," she said.
Ms Crook added: "We support the idea that prisoners are given the opportunity to work and pay taxes, contribute to the upkeep of their families and pay money to a fund for victims.
"But the focus should be on getting prisoners into paid work in prison itself, where the kind of deductions envisaged by the Prisoners Earnings Act could then be made."
'Make amends'
Prison Reform Trust director Juliet Lyons said the government measure was a good idea in principle but it was important prisoners were not put off working altogether.
She said: "It's always a problem if people leave prison with absolutely nothing. It's likely to cause further offending. And so a scheme like this has to be thought through carefully so that money is set aside for victims but that we also pay attention to resettlement."
Victim Support chief executive Javed Khan, said the money would be used "to deliver real, practical support for victims and communities".
"Getting prisoners working and developing workplace skills should help them on the path to reform," he said.
"This will be very much welcomed by victims as they are united in wanting offenders to stop committing crimes."
Victims' Commissioner Louise Casey added: "Victims want criminals to be punished for their crimes and make amends for the harm they have caused.
"I believe the principle of criminals contributing to the costs of support for victims should be extended, and am hopeful that the government will now extend the victims' surcharge that judges and magistrates impose such that it applies to all offenders."
Justice Secretary Ken Clarke told last year's Conservative Party conference that prisoners in England and Wales should work a 40-hour week.
He said the government was planning a major expansion of prison industries to get more inmates working.
Comment:
In my view a 40% Victim Tax upon convicted prisoners only makes those prisoners more victimised. Any contribution should be on a voluntary basis. Then there is the priciple of no taxation without representation, and as you know the government has yet to allow convicted prisoners to vote. The Association of Prisoners is totally opposed to this kind of exploitation as it is akin to slave labour.
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