The major hurdle in a radical overhaul of police pay and conditions has been cleared after an independent tribunal backed proposals to save £160m a year on their pay bill by streamlining overtime and allowances.

The police arbitration tribunal has backed most of the key principles of the proposals put forward by the former rail regulator, Tom Winsor, with the bulk of the savings coming from the abolition of £1,200-a-year "special priority payments" and a two-year freeze on officers automatically moving up payscales.

But the tribunal also wants to see more generous treatment of police officers who get sent to deal with riots outside their force area with a new "away from home overnight allowance" of £50 a night to be paid to those involved in "mutual aid" operations.

The dispute over reforming police pay and conditions is one of the most sensitive public sector pay issues facing the government with the police staff federations retaining a degree of political muscle no longer enjoyed by the trade union movement.

The dispute over the Winsor recommendations for reforming police pay and conditions went to arbitration after talks between Theresa May's Home Office and the Police Federation broke down in acrimony last year. Officers also face a two-year pay freeze and increases in their pension contributions along with the rest of the public sector.

The tribunal, chaired by Prof John Goodman of Manchester School of Management, recommends that the pay progression freeze should apply to all officers, except new probationers, to produce savings of £177m on the annual pay bill.

It has rejected Winsor's plan for a new skills bonus to replace an automatic competency allowance that became known as "grab a grand" and instead backed scrapping special priority payments, which were supposed to reward frontline roles but had become routine, to save a further £86m a year. The competence-related threshold payments of up to £1,000 a year are to be kept for those who already get them but there should be a two-year freeze on new applications, it said.

The tribunal package also recommends £10m savings in overtime and a further £2m in chief officers' and superintendents' bonus payments.

The package includes extra payments for some police officers with a 10% pay uplift for those working unsocial hours at a cost of £106m and a £6m improvement in maternity pay from 13 to 18 weeks. The tribunal's report put the package's net saving at £163m a year, just £5m short of Winsor's original proposals.

The police policy expert Blair Gibbs of the Policy Exchange thinktank said the main losers would be officers who did not do unsocial hours, were not deployable on mutual aid operations, and who had relied on overtime income and other perks.

The Home Office said May would now consider the findings very carefully. "It is important that ministers take the time to consider the report in full before making a decision," said a spokesperson.

The Police Federation said it was "extremely disappointed" by the outcome but would accept the ruling. "We know that many police officers across England and Wales will be angry and dismayed about their future. However, we entered into the negotiation process in good faith and therefore, whilst not happy with the entire decision, accept their ruling," said the federation chairman, Paul McKeever.

"Moving forward, we will do everything in our power at the police negotiating board to minimise the negative impact today's decision could have on police officers."