Wealthy criminal defendants with disposable incomes of more than £37,500 a year will no longer automatically be entitled to legal aid under a further round of cuts unveiled by the Ministry of Justice.

The savings, aimed at reducing the legal aid bill by £220m annually by 2018, will also for the first time introduce competitive tendering among solicitors' firms for contracts to represent defendants in police stations and magistrates courts.

The changes, set out in a Ministry of Justice consultation paper, were received with dismay by the legal profession, which has endured successive fee cuts and funding restrictions under the coalition government.

The justice secretary, Chris Grayling, defended the changes as necessary to improve efficiency. "We have an excellent tradition of legal aid and one of the best legal professions in the world," he said. "But we cannot close our eyes to the fact legal aid is still costing too much. It is not free money, it is paid for by hard-working taxpayers, so we must ensure we get the very best value for every penny spent.

"Some lawyers earn hundreds of thousands of pounds from just one or two cases, and these cases can themselves cost up to £15m each. And we've all heard of wealthy criminals with stashed millions getting legal aid to pay for their defence or of prisoners given legal aid unnecessarily.

"We will continue to uphold everyone's right to a fair trial but that doesn't mean we shouldn't look again at how the system which provides this is operated."

The introduction of an income threshold is expected to remove legal aid eligibility only from about 200 cases a year. It will affect those who have annual disposable incomes of more than £37,500 after deductions for tax, mortgage payments, food and household bills.

Criminal legal aid currently costs more than £1bn a year. The recent Legal Aid, Sentencing and Punishment of Offenders Act slashed £320m from the annual budget for civil cases.

The legal aid system in England and Wales is "one of the most expensive in the world", according to the MoJ, costing taxpayers £39 a head compared with £10 a head in Canada.

Other savings include stopping legal aid for prisoners who pursue claims about the category of their jail or the way correspondence is handled. That would affect 11,000 claims a year and save £4m. Those objecting to the length of their sentence would still be eligible for legal aid.

A residency test will be introduced so that only those "with a strong connection to the UK" can receive civil legal aid. Asylum seekers would, however, be exempted from this restriction.

Funding for judicial review cases will be tightened up, only allowing payment after a judge has agreed a case is strong enough to proceed. Funding for what are known as 'criminal very high cost cases', for which barristers can earn up to £500 a day in court, will be cut by 30%.

One of the most controversial changes is the introduction of competitive tendering for legal aid contracts in a bid to drive down fees. The new contracts will be far larger than existing centrally fixed agreements and are likely to lead to further consolidation among solicitors' firms. The government has, however, backed away from the threat of competitive tendering in crown courts where most barristers work.

The Law Society, which represents solicitors in England and Wales, warned that the changes would undermine the tradition that clients can choose which lawyer represents them in court.

Richard Miller, the Law Society's head of Legal Aid, said: "Client choice is widely regarded as an important driver of quality in the justice system. It is very concerning, and revealing, that the government appears prepared to sacrifice this vital principle."

Lucy Scott Moncrieff, the president of the Law Society, said: "Introducing price competition … will require a huge reshaping of the way justice is delivered and is completely unrealistic to deliver in the timescale government has proposed.

"If it's not done properly then we are going to end up with miscarriages of justice, with people being stuck in prison far longer than they should be on remand, with witnesses not turning up, with cases not being properly prepared. It's a huge, huge risk."

Akhtar Ahmad, the president of the London Criminal Courts Solicitors Association, said: "The likely consequences of this experiment will be miscarriages of justice, a rise in the prison population and a tendering debacle. Following on from the civil legal aid cuts, tendering for criminal defence threatens to rip apart the fabric of justice."

Maura McGowan QC, the chairman of the Bar Council, which represents barristers in England and Wales, said: "Whilst tendering for crown court advocacy is not an option being consulted upon, that news comes alongside swingeing fee cuts, which will hit the criminal Bar exceptionally hard.

"The publicly-funded Bar is a vital frontline service, which is already at breaking point. For those who have invested a decade or more in developing their skills and expertise, these proposals, alongside prosecution cuts, will be a particularly bitter pill to swallow."

The funding changes are not expected to require primary legislation in parliament.