David Cameron is being advised to put an extra £2.7billion a year into social security — so the unemployed can keep more of their benefits when they get a job.

Iain Duncan Smith, the former Tory leader and Mr Cameron’s poverty adviser, says that too many people are still better off on benefits than in low-paid work, which is the only thing on offer for many.

Rather than reducing benefits and making it increasing difficult to qualify for them — the strategy adopted by both main parties when in office — he wants to make more low-paid jobs worth taking. Under his scheme, the 51 existing unemployment and in-work benefits would be replaced with a “universal work credit” and a “universal life credit”.

The income level at which these new benefits would be withdrawn should be far higher than the levels currently set for housing and other benefits, says Mr Duncan Smith, so that low-paid jobs become more attractive because those on benefits would not automatically forfeit them.

Under his plans, 4.9million households where couples, single parents and single workers live would be better off — especially those working fewer than 30 hours a week.

The losers would be 37,000 lone parents who work 16 hours a week, a level where the current tax credits scheme is most generous. Also losing out would be several hundred thousand families earning between £30,000 and £50,000 a year. They would lose their entitlement to children’s tax credit.

Mr Duncan Smith’s plans are unveiled on the same day as new unemployment figures are published. The new figures are expected to show the jobless total rose above 2.5million in August. In July the figure was 2.4million — a 14-year high.

Economists working on Mr Duncan Smith’s report say the upfront cost of his plans would lead to savings of £3.4billion a year in lower unemployment, and in reducing the complexity of the system, therefore cutting administrative costs. His plans for a “dynamic” benefits system would be the most radical shake-up of social security since the Second World War. It has won the backing of Sir David Freud, the Government’s former welfare reform guru.

Mr Duncan Smith has been working on solutions to social problems in Britain since resigning as Tory leader in 2003. He said in his report Dynamic Benefits that there are too many disincentives in the current system, both to take jobs and for couples to stay together if they are low-paid: “The recommendations hold to the simple principle that work is the sustainable route out of poverty.

“We believe the system — which smoothes out the participation and marginal tax rates so there is no financial disincentive to work — should be taken seriously by members of every political party,” he said.

“Unless we put the system right now, we risk increasing the number of residually unemployed, only this time it will manifest itself as large numbers of younger people permanently excluded from gainful employment.

“That is why we simply cannot go on talking about the importance of getting people into work, while we persist in creating disincentives for the very people we say should be in work.

“Our existing complex and inefficient benefits system should finally be laid to rest.”

A spokesman for Mr Cameron welcomed the report. “We understand the current welfare system is complex, confusing and needs serious reform.

“However, any changes need intense and careful scrutiny and we shall be looking at these proposals in that light,” he said.

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