The payments are blamed as fuelling the rising cost of car insurance – up 40 per cent in the past 12 months.
The move follows on the Office of Fair Trading launching an investigation in to car insurance costs that looks at whether charges and prices rises are fair to motorists.
The latest ban has badly hit car insurer Admiral, which reportedly earned £147 million last year from selling driver’s details to personal injury lawyers.
The practise is estimated to add up to £30 a year on to the cost of every driver’s insurance.
Announcing the ban, Justice Minister Jonathan Djanogly said: “The ‘no-win, no-fee’ system is pushing us into a compensation culture in which middle men make a tidy profit which the rest of us end up paying for through higher insurance premiums and higher prices.
“Honest motorists are seeing their premiums hiked up as insurance companies cover the increasing costs of more and more compensation claims. Many of the claims are spurious and only happen because the current system allows too many people to profit from minor accidents and incidents.
“Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system. People are being encouraged to sue, at no risk to themselves, leaving schools, business and individuals living in fear of being dragged to the courts for simply going about daily life.
“We will ban referral fees and we will go further. We have proposals before Parliament to end the bizarre situation in which people have no stake in the legal costs their cases bring. This will make claimants think harder about whether to sue and give insurance companies and business generally an incentive to pass the savings onto customers through lower prices.”
The ban will be written in to a new law currently passing thorough Parliament and wis expected to come in to force next year.