Politicians' pay-rises have been cut and their salaries will now be pegged to those of the wider public sector.

Prime Minister John Key announced an overhaul of the Remuneration Authority Act this afternoon, following anger at the size of MPs pay increases.

Mr Key said the decision was made by Cabinet after the authority's latest decision which saw the total remuneration received by MPs increase by about 3.5 per cent.

"That increase was neither necessary nor justified at a time when inflation is at 0.8 per cent," Mr Key said.

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"[MPs] should not be receiving increases which are disproportionate to the wider public sector."

In announcing their latest decision, the Remuneration Authority said it had been made according to criteria contained in the Remuneration Authority Act 1977.

Mr Key said that meant a law change was necessary.

The change will mean the only thing considered will be the average public sector pay increase for the previous year.

The new legislation will be backdated to July 1 2014, meaning the pay increase announced last week will not be awarded.

Last Thursday it was announced that MPs would get a pay rise of 5.5 per cent - which translates to a $8200 pay rise for backbench MPs.

The Remuneration Authority said that once a reduction in the travel entitlement was taken into account, MPs' pay packages would increase by 3.5 per cent.

Before today's action, Mr Key's salary would rise by $23,800 to $452,500.

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Mr Key has previously said he was disappointed with the authority's decision.

That lead opposition leader Andrew Little to accuse the Prime Minister of "crying wolf", given he had not taken action for five years to make sure pay-rises were not large.