Refugee Action has won a judicial review against the Home Secretary, Theresa May, in the High Court.
The charity had challenged May over her ruling that the financial assistance available to asylum seekers in the UK would be frozen at 2011 levels. The High Court ruled that the Home Secretary was "irrational" and "misunderstood information" when setting the level of financial support.
Mr Justice Popplewell ruled on Wednesday that decision-making was flawed, saying that May had "failed to take reasonable steps to gather sufficient information to enable her to make a rational judgment in setting rates for 2013/2014".
According to Refugee Action, people whose asylum claims have not been finally determined and do not have the right to work receive financial support of as little as £5.23 a day.
The ruling requires the Home Secretary to make a new decision on the level of support by 9 August. A Home Office spokesman said it was disappointed by the judgment and was looking at all options, including appeal.
Dave Garratt, chief executive of Refugee Action, said: "We would welcome the opportunity to share our expertise with the Home Secretary. Together we need to develop an asylum support system that is fair and lawful, and means asylum seekers are able to live with dignity."
Mr Garratt said that the decision to seek the judicial review had not been taken lightly and that it followed "extensive research and advocacy by Refugee Action and our partners across the sector. After five years of our evidence being ignored, we felt legal action was our only option."
Last year, Refugee Action campaigned successfully for changes to Home Office guidelines to say that volunteering was lawful for refused asylum seekers.