Jobless benefits claimants could be banned from spending their welfare payments on alcohol, cigarettes and gambling under a Conservative plan to slash the UK’s welfare bill.

An estimated 350,000 benefits claimants would face receiving their payments on a pre-loaded card, which it would be impossible to use for cash withdrawals, betting, or buying cigarettes or alcohol.

Under the Tory scheme, anyone who claims Universal credit (UC) when they are looking for work would get six months of full benefits – but after that, anyone who has not consistently contributed to the welfare system over years would have their payments slashed.

The full rate would be available only to people who have contributed to the welfare system through their taxes for a sustained period.

Under the plans, every two years a UC claimant has worked would buy them an extra year on the full rate of the benefit.

But jobseekers who do not have a record of working and contributing would have their UC standard rate cut by a third to a new “subsistence allowance”.

And that payment would be loaded onto a “back-to-work” pre-payment card that came with the restrictions on spending.

People who are off sick or disabled, or who are claiming UC while in work, would be exempt.

The Conservatives estimate the shake-up could save taxpayers £538m a year.

Party leader Kemi Badenoch claimed the current system was unfair to workers.

“Some will say this is unfair on people claiming benefits. What is unfair is a system where someone who can work chooses not to and earns more from benefits than someone in a job,” she said.

“Helping people into work is not punishment. The best welfare is a well-paid job. So we will be tough on those who exploit the system because the current system is unfair to workers, taxpayers and those who truly need support.”

She said the UK should not “be borrowing from our children and grandchildren to support people who simply refuse to work”.

Helen Whately, the shadow work and pensions secretary, said: “We cannot go on like this – with millions of people living on benefits instead of in work. Britain can’t afford it.”

Further plans for welfare reform are likely to be revealed at the Conservative conference this month.

Prime minister Andy Burnham has indicated that reforms to the benefits system will be revisited under his government.

A Labour Party spokesperson said: “The Conservatives had 14 years to fix our welfare system but they completely failed to make meaningful reforms.

“Now they are proposing an unworkable new card scheme, which does nothing to tackle the numbers of people their system left signed off and written off.

“While the bill for the taxpayer rose by £33 billion in their last year in government, this Labour government is introducing effective and sustainable welfare reform alongside a £3.5 billion employment support package to help people stay in or return to work, and the national rollout of the jobs guarantee for young people who have been on Universal Credit.”

Organisations representing the hospitality and betting industries and human rights in the UK declined to comment.