The Government has accepted a Law Commission report recommending that MPs' allowances and entitlements should be set by an independent authority.
When legislation is passed MPs will lose control of their perks, something they have fought against for decades.
The report, released today, made a strong case for all entitlements and allowances to be set by the Remuneration Authority, the independent body which sets MPs' salaries.
Prime Minister John Key said it was important that the regime for setting ministers' and MPs' expenses had public confidence.
"Accordingly, it is the Government's intention to accept the broad thrust of the recommendation to move decision-making regarding remaining MP and ministerial expenses to an enhanced Remuneration Authority," he said.
"Cabinet will consider the timing of the new legislation early in the new year, but it is my intention that it will be passed before the end of 2011."
The report said the system couldn't be fixed by tinkering with it.
"We just can't go on like this," former Law Commission president Sir Geoffrey Palmer told NZPA.
"MPs are put under pressure by the system itself, it isn't fair to them and it isn't fair to the public.
"They are often under suspicion...because they are involved in setting the amounts themselves."
The report said fundamental change was needed and it recommended replacing the Civil List Act, which authorises payments to MPs, with new legislation which has been written as a draft bill.
It recommended the Remuneration Authority should have two specialist members added to it, one an experienced former MP.
"I'm really trying to help the system, not hurt it," said Sir Geoffrey, who held office while the report was prepared.
"It's got to be clear, it's got to be transparent, and it's got to be set by a third party."
He believed the most important point that should be considered was the public's trust in the quality of New Zealand's democracy.
"If the elected representatives in our central democratic institution don't have public respect, then our whole system becomes much more fragile," he said.
The commission consulted all the parties in Parliament while it was working on the report.
It said Parliament's Speaker, Lockwood Smith, had "real reservations" about an independent body setting MPs' entitlements.
"He is particularly concerned that an independent body would not understand the needs of Parliament," it said.
"His strong preference would be to continue to use the mechanism of the Speaker's Directions which are flexible, easy to amend and draw on the experience of the Speaker."
Sir Geoffrey said the report carefully reflected Dr Smith's view "but we don't agree with it".
The commission also said the Parliamentary Service, which makes payments to MPs, should be opened to the Official Information Act (OIA).
This has been previously rejected as well, although parties have started voluntarily issuing details of their MPs' expenses.
"While the move to greater transparency is commendable, and provides more information about the total spending of MPs, in some respects the disclosure still lacks transparency," it said.
"The figures do not distinguish between domestic and international flights, or separately identify travel paid for an MP's spouse or partner and dependant children...clearly, a voluntary regime is not the same as a statutory requirement."
It did not include that requirement in its draft bill, saying it would issue a separate report on the OIA next year.