Prisoners who have taken jobs outside jail are urging the High Court to rule that the levy on their wages which goes to victim support is too high.
A test case for several working prisoners who cannot be named, affects inmates working in the community as they prepare for their release.
Under the Prisoners' Earnings Act 1996, inmates engaged in "enhanced wages work" outside prison have 40% of pay that is in excess of £20 paid to victim support.
Their lawyers today challenged the legality of the way Justice Secretary Ken Clarke is operating rules governing deductions from pay packets.
Kate Markus, appearing with Hugh Southey QC for the working prisoners claimed that the payments were "disproportionate" and there was "widespread concern" about the levy.
She referred to the pressure group "Unlock" (the National Association of Reformed Offenders) which argues that the levy is undermining rehabilitation and acting as "a disincentive to work".
She told Mr Justice Sales at London's High Court that Mr Clarke could, and should, have allocated a portion of the 40% levy to help the inmates rebuild their lives as well as help victims.
Ms Markus asked the court to declare that the way Prison Service rules were being applied to inmate's earnings was "incompatible" with the European Convention on Human Rights.
She said: "It would have been possible for the Secretary of State under the Prison Rules to acknowledge that prisoners need to make savings for their release, and to set aside money for their dependants and other significant needs.
"The evidence shows that not sufficient is left from the money prisoners earn to set aside those amounts."
Ms Markus said Mr Clarke had failed to strike a balance between the interests of victims of crime and inmates.
She said:
"The Secretary of State has only considered making provision for victims and not considered the needs of prisoners."
The case mostly affects the inmates of open prisons but also some Category C prisoners allowed to work out in the community on day release under contracts of employment.
The rates of pay from outside employers are higher than those for work performed in prison.
Different prisoners have been involved in launching today's legal challenge, with at least one dropping out after being released.
One woman inmate found work as a receptionist and cleaner at a hotel earning a minimum wage of £94 a week, while one male prisoner worked for a carpet store earning over £240 a week.
The court heard claims that prisoners with high travel expenses to reach work were being left with no wages.
There were also complaints that they were being left with insufficient to pay towards costs of resettlement such as helping out with family expenses, or saving for a rent deposit and furniture for when they were released.
The hearing continues tomorrow.
A Ministry of Justice spokesman said later: "For too long the financial burden of repairing the damage done by crime has fallen to the taxpayer alone.
"We think this is wrong, which is why we introduced the Prisoners' Earnings Act to make offenders share the financial burden of crime.
"By making them contribute to the funding of vital victims' services, we believe offenders go at least some way to repaying their debt to society and to taking responsibility for the crimes they commit."