The Bibby Stockholm barge will stop housing asylum seekers from the end of January 2025 as part of the government's overhaul of the asylum system.
The barge, currently moored in Dorset, was set up by the last Conservative government as one of its attempts to cut hotel bills for people who had come to the UK via small boat crossings.
But the Home Office has now confirmed it will end the contract from next year "as part of the government's commitment to clear the backlog and fix the asylum system", saving more than £20m from renewing.
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Axing the use of the barge for asylum seekers is part of an expected £7.7bn of savings in asylum costs over the next decade, the Home Office said.
Minister for border security and asylum, Dame Angela Eagle, said: "We are determined to restore order to the asylum system, so that it operates swiftly, firmly and fairly; and ensures the rules are 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.
"The Bibby Stockholm will continue to be in use until the contract expires in January 2025."
The Conservative government started using the three-storey barge to house asylum seekers in August 2023, despite opposition from MPs, charities and the local community.
Soon after the first group boarded the vessel, which could house 500 people, there was an outbreak of Legionella bacteria found in the barge's water system.
And in December, an Albanian asylum seeker died on board.
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