As much as £500million will be taken from around 10 million people who invest through insurance firms, according to Sir Steve Webb.
He said details buried in this week’s Budget show anyone who puts money into popular products such as an endowment or “whole of life policy” will be hit with a higher tax bill.
Previously the taxman took a slice of any annual increase in the savings pot after inflation.
But under the new plans the whole of the increase will be taxed.
Sir Steve, now director of policy at Royal London, said: “This is a tax raid on ordinary, hard-working savers.
“What sounded like a technical Budget change will take millions of pounds from people who have been faithfully saving for years.”
The move will affect customers of insurance giants such as Prudential and Aviva.
At the moment if you give an insurance company £1,000 to invest and it generates a three per cent return of £30 there would be no tax to pay because inflation is running at three per cent.
The insurance company only collects tax on any growth above inflation and hands it over to the Treasury.
But from January 2018 that three per cent will be taxed – so it’s really a tax on inflation.
Chancellor Philip Hammond presented the tax change as an alteration to Corporation Tax Indexation.
But companies are not affected because they only collect the tax for the Treasury.
Mr Webb added: “From January we will have to collect more tax from savers to give to the Treasury. This is not a tax on fat cats or City firms but on people who have done the right thing and made sacrifices. The Government needs to think again about this policy.”
Treasury sources claim the move brings the system into line with Capital Gains Tax, which people pay when they make a big profit on an investment.
But Mr Webb said the CGT threshold was about £11,600 – far above what most ordinary savers would make through insurance policies.
A Treasury spokesman insisted insurance companies could choose to pay the tax themselves.
He said: “The changes in this Budget correct an imbalance in the system by removing an outdated measure. Most fund managers can choose not to pass on any additional costs to their clients.”
Mr Webb said the tax was based on the increase in an individual’s savings rather than a company’s profits.
On Tuesday the Bank of England’s deputy governor Sir Jon Cunliffe urged savers to boycott banks which failed to increase interest rates after the Bank raised the base rate by 0.25 per cent.
Just one in seven savings accounts have adjusted their rates to reflect the rise, meaning savers are missing out on £4million a day.