US corporate executives face drastic reductions in their retirement nest-eggs under proposed tax legislation that would also hit Wall Street banks and other large companies.

The measures, likely to be approved by the Senate on Tuesday 30 and expected to become law in the next few months, are part of a drive by the new Democratic Congress to fund promised tax relief for the middle class and businesses by closing loopholes and increasing the costs of corporate wrongdoing.

The new tax legislation, which could add more than $800m to the collective tax bill of US executives in the next decade, is also the first attack by the new Congress leadership on excessive executive compensation. The issue has risen to the top of the corporate governance agenda following investor protests at pay awards for US chief executives.

The new rules to be considered by the Senate are part of the measures aimed at offsetting the costs of more than $8bn of tax relief for small businesses hit by a proposed rise in the minimum wage. For the bill to become law, it will have to be approved by the House of Representatives.

The proposals, which were approved by the Senate finance committee last week, would cap the amount of compensation that executives can defer until retirement - a common method used to minimise taxes.

Under the new regime, executives would be allowed to defer up to $1m a year or the average of the previous five years’ taxable salary, whichever is lower. Any sum above that would incur taxes and a 20 per cent penalty.

The measures have been attacked by business organisations and executive pay consultants, who argue they will prompt companies to pay higher salaries and bonuses upfront to compensate for higher taxes.