Former Tory leader Iain Duncan Smith has recommended sweeping reforms of the welfare system, that could eventually move more than half a million households from benefits into work.

His think-tank, the Centre for Social Justice, called for simplification of the system, which it claims would eventually save the taxpayer £700m.

The report says that under the present system some claimants are worse off if they take a job paying less than £15,000 a year as they will lose benefits. It recommends measures to remove financial barriers to finding a job.

The proposals have been presented to Tory leader David Cameron as a blueprint for reform of the benefits system.

Duncan Smith claimed that, if implemented, his proposals would be the most radical changes since the 1942 Beveridge report established the welfare state.

In his preface to the report, he said: "This review marks a watershed for Britain's benefits system. The recommendations hold to the simple principle that work is the sustainable route out of poverty.

"We believe the group's success in devising a system, which smoothes out the participation and marginal tax rates so that there is no financial disincentive to work, should be taken seriously by members of every political party."

The report found that a claimant who takes a low paid job can lose up to 90 per cent of their income. Another key obstacle to working was the marginal tax rate, which can be more than 70 per cent for low earners. This meant people were hesitant about taking better paid jobs or working longer hours.

It recommends that benefits be withdrawn more gradually, as wages increase, and that the system be simplified with just two benefits available to those of working-age - a universal work credit encompassing jobseekers' allowance and income support, and a universal life credit encompassing housing benefit, working tax credit, and child tax credit.

Jim Knight, Welfare Reform Minister, was skeptical about the suggestions. He said: "Where on earth does Iain Duncan Smith get the billions of pounds for this when David Cameron wants to cut billions in public spending right now?

"And how would this help anyone into work if the Conservatives also want to cut support for the economy and the help to get people into jobs?"

He added: "Over the past 12 years, we have reformed welfare to get far more people back into work and made work pay by introducing the national minimum wage and tax credits that the Tories opposed.

"If the Tories are serious about wanting to help people, they should back Labour's £5 billion investment to help people find work and off benefits."