The contract for the Bibby Stockholm barge, which houses asylum seekers off the coast of Dorset, will not be renewed past January, the Home Office has announced.

Extending the use of the barge, which is moored off Portland, would have cost more than £20m next year.

The three-storey vessel has capacity for up to 500 men, aged from 18 to 65.

Now run under a Labour government, the Home Office said the move was part of a commitment to “clear the backlog and fix the asylum system”.

Dame Angela Eagle, the minister for border security and asylum, said she wanted the asylum system to operate “swiftly, firmly and fairly” and ensure the rules were properly enforced.

“The Home Secretary has set out plans to start clearing the asylum backlog and making savings on accommodation which is running up vast bills for the taxpayer,” she said.

Ending the use of the Bibby Stockholm forms part of the expected £7.7bn of savings in asylum costs over the next decade.

The barge will continue to house migrants until the contract expires in January 2025.

Dorset Council leader Nick Ireland said the authority had always been opposed to the barge being sited at Portland Port, and that the latest decision was “welcome”.

“Since the Bibby Stockholm arrived a year ago, we have worked hard to support the residents of the barge and also tried to mitigate the impact on local communities,” he said.

“We will work closely with the Home Office and other partners to ensure the smooth running of arrangements over the final few months.”