People will be allowed to keep claiming sickness benefits after returning to work and will be offered tax breaks for getting jobs, under plans to boost employment.

A reform of disability benefits is likely to scrap a “perverse” assessment system, which ministers think encourages people to prove they are too ill to work, in an effort to reverse a rise in the number of people not looking for jobs.

It is understood that the Treasury is discussing plans to incentivise people to return to work by offering tax breaks.

Rishi Sunak is said to be concerned that he will struggle to fulfil a pledge to achieve economic growth this year, if the government cannot tempt many of the nine million economically inactive people back into work to deal with chronic labour shortages.

The prime minister said last week that “we need to look at how our welfare system is operating”, questioning whether it was “incentivising people who can be to be in work”.

Mel Stride, the work and pensions secretary, is drawing up plans to “rewire” the benefits system as ministers grapple with a rise in the numbers not looking for work since the pandemic.

Post-pandemic labour shortages have given fresh urgency to efforts to tackle the rise in those on disability benefits. Numbers have gone from under 600,000 in the early 1990s to about 2.2 million today, largely driven by mental health conditions.

Since the pandemic, successful disability claims are up 70 per cent and the Office for Budget Responsibility has said that as a result long-term sickness benefits will cost taxpayers £3.7 billion more than previously estimated this year, rising to £8.2 billion by 2027.

About 20 per cent of those claiming disability benefits say that they want to work but under 2 per cent move into employment every month.

A health and disability white paper due before the spring budget will recommend reforming or scrapping the “work capability assessment” system used to assess eligibility for benefits, as Stride pushes for “ambitious and extensive” reforms. Ministers want to remove what is described as a “perverse incentive to prove how sick you are” and replace it with a system that encourages claimants to show what work they might be capable of taking.

The Treasury is also holding discussions about using the tax system to encourage people to return to the workforce, through increased tax-free allowances. Officials have been urged by senior ministers to consider exempting over-50s returning to work from income tax entirely for six months to a year. “The biggest challenge we’re facing is how to get people back into the workforce,” a senior government source said. “There’s a discussion in the Treasury about how to use the tax system, whether people could be given a bigger tax allowance during the first few years they are back in work.”

However, there are concerns that offering tax breaks to people returning to work could alienate those who are already working. “How would you feel if you’ve worked flat out for your entire career and someone comes in and is given preferential treatment?” another government source said.

The Department for Work and Pensions has drawn up plans to separate assessments of eligibility for benefits from judgments about what type of work someone might be able to take and what help was needed to do so.

Ministers believe that the present system, which makes up to £4,000 a year in benefits conditional on work capability assessments, encourages claimants to appear as ill as possible.

People claiming employment and support allowance and universal credit who are judged as having limited capability for work are reluctant to look for a job for fear they will lose the payments, and officials are trying to design a system that does not leave claimants concerned about being judged capable of any employment. It has yet to be decided when benefits might be withdrawn once a claimant has found work. A system similar to the tapering of universal credit as people earn more is being considered.

A government source said: “It’s very much not the case that we’d be relaxing assessments so you could be perfectly fit and claiming disability benefits, but it will be more about being supported into work and supported to do the things you can do, rather than incentivised to prove how incapable you are”.

Another option under consideration is a system that assesses people as limited for certain types of work conditional on specific support, to reassure claimants that they will not lose all disability benefits if they find a job. A specific “severe disability” category to allow those with the most limiting conditions to claim help more easily is also being considered.