Thousands of British military personnel who were dismissed from service because of their homosexuality will be able to apply for payments worth up to £70,000 each from today, to recognise the distress caused by a ban that applied between 1967 and 2000.

Labour ministers have approved the creation of a £75m compensation scheme, nearly a quarter of a century after the ending of a policy that led to some soldiers being jailed, while others were stripped of their medals and lost their pension rights.

John Healey, the defence secretary, described the historical treatment of LGBT veterans as “a moral stain on our nation” and said ministers were determined to “right the wrongs of the past and recognise the hurt that too many endured”.

Earlier this year, the Falklands veteran Joe Ousalice, a bisexual Royal Navy radio operator who was dismissed in 1993 for being “prejudicial to good order and naval discipline”, said he feared dying of cancer before receiving any compensation.

Gay men and lesbian women were banned from serving in the British military until 2000. About 200-250 were thrown out each year because of their sexuality, though the exact figures are not known as proper records were not retained.

Healey will lead a debate in the Commons on Thursday to announce the scheme, and the Ministry of Defence has invited LGBT veterans to attend in the public gallery. “We have listened to veterans,” the defence secretary said.

Those who were dismissed on grounds of their sexuality will be eligible for a flat payment of £50,000 plus further payments worth up to £20,000 based on how severely they were treated at the time. Veterans will also be able to apply to have their rank restored and their reason for discharge amended.

Labour increased the size of the scheme by 50% to £75m. An independent review published last year by a former judge, Terence Etherton, had recommended that the compensation fund had been capped at £50m. Increasing the size of the fund added to the time taken to make the announcement, officials said.

Etherton’s review contained evidence of dozens of cases of homophobia, victimisation, mistreatment and intrusive investigations. In one example, a former member of the Royal Navy admitted having a sexual experience with another man while on leave, aged 19, because he did not want to be exposed to blackmail.

The veteran, who is anonymous, said he was “dragged from my bed” by naval police the next morning and “humiliated by being marched off of the ship in front of the entire ship’s company”. He was detained at Portsmouth for months without legal representation, made to do “degrading menial tasks” and finally court-martialled and dismissed after being told he had broken the age of consent at the time.

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The episode “led to my parents disowning me, along with the rest of my family” and had affected his life, leading to “long self-destructive behaviour” including alcoholism and depression, because “I had what I thought would be a confidential conversation with my divisional officer confessing a sexual experience I had had whilst on leave.”

The last serviceman to be sent to prison for being homosexual was David Bonney, who was found guilty at a court martial in Cornwall in 1993. Bonney said he was subject to a two-year investigation after a copy of the Gay Times had been found in his room, involving him being bugged and followed by military police.