Royal Bank of Scotland has said it will cut this year's staff cash bonus by more than 90% to £175 million.

The bank, which is now nearly 70% owned by the taxpayer, said there would be "no reward for failure" as it announced the cuts and confirmed no discretionary cash bonuses would be made for 2008.

The news came as Chancellor Alistair Darling insisted bonuses at the bank would be slashed to the "absolute legal minimum".

The bank also announced a 2009 pay freeze for senior and US staff, as well as those in its investment banking arm, the division that has been largely responsible for mammoth losses at the group. Other staff will on average receive below inflation pay rises, added RBS.

It has also introduced an option to "clawback" any of the non-cash awards made to staff for 2008 if losses arise from their activities. The bank is now conducting a review of its pay and incentive policies, with more details due in its forthcoming annual report.

Sir Philip Hampton, RBS group chairman, said: "A fundamental reform to pay and reward is needed to reflect the reality of the situation the company is in. We fully recognise, as a company, that we have to change materially not just the business we do but also the way we do business. Our overarching aim is to restore the standalone health of the Group as soon as is practicable."

Mr Darling said the new system of bonuses represented a "cultural change" within the bank. "We have had the opportunity now to open the books, to go through what RBS has been doing," he said.

"A huge amount of change has to take place in this bank and what you are now seeing is a cultural change in the way in which payments are made."

The Government has been facing intense pressure to halt all bonuses at RBS and Lloyds Banking Group - the two banks bailed out by the taxpayer.

MPs across the political spectrum have argued that it is wrong for the banks which have taken public money to make bonus payments.

Giving evidence last week to the Commons Treasury Committee, RBS chief executive Stephen Hester said they could not ignore obligations as well as the need to retain their best staff.

The announcement will now put pressure on Lloyds - which includes the loss-making HBOS - to cut back its bonuses to the minimum.