Prisoners serving sentences under 12 months will be forced to undertake a period of rehabilitation upon release under proposed reforms.
As part of a "rehabilitation revolution", Justice Secretary Chris Grayling said short custodial sentences will for the first time include a period of rehab in a bid to curb reoffending.
Inmates serving under 12 months only currently undertake rehab on a voluntary basis and are otherwise released into the community with no supervision or support.
High reoffending rates triggered the overhaul with almost half of all prison-leavers reconvicted within 12 months, and for those serving less than a year that figure rises to almost 58%.
The proposals call for greater use of mentors who will meet offenders at the prison gates, while private contractors will provide probation services under "payment by results" contracts.
Revealing the reforms, Mr Grayling said: "What we do at the moment is send people out of prison with £46 in their pocket, and no support at all. No wonder we have such high levels of reoffending. It is madness to carry on with the same old system and hope for a different result."
The reforms will see the public sector probation service continue to deal with the most high risk offenders, including all serious sexual and violent offenders. The final reforms will be set out in spring this year with the roll-out across England and Wales by spring 2015.
Mr Grayling added: "We know across the public, private and voluntary sectors there is a wealth of expertise and experience - we need to unlock that so we can finally begin to bring down our stubbornly high reoffending rates.
"Our proposals will see all of those sentenced to prison or probation properly punished while being helped to turn away from crime for good. They will also mean we only spend taxpayers' money on what works when it comes to cutting crime."
Shadow justice secretary Sadiq Khan said: "Payment by results in criminal justice is untested, and the Tory-led Government are taking a reckless gamble with public safety. Pilots were already under way to see if payment by results worked and to ensure any problems were ironed out before being rolled out. The new Justice Secretary, Chris Grayling, is demonstrating breathtaking arrogance in choosing to ignore the pilots."
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