The tax-free personal allowance, which rises to £12,500 in April, should be scrapped and replaced with a flat payment of £48.08 a week for every adult, according to radical proposals welcomed by shadow chancellor John McDonnell.

The proposal, from the New Economics Foundation thinktank, is for a £48.08 “weekly national allowance,” amounting to £2,500.16 a year from the state, paid to every adult over the age of 18 earning less than £125,000 a year. The cash would not replace benefits and would not depend on employment.

The policy idea has been welcomed by the shadow chancellor, John McDonnell, and the Green MP Caroline Lucas, and would mean that as many as 88% of all adults would see their post-tax income rise or stay the same, helping to lift 200,000 families across the country out of poverty.

The weekly payments would be fully funded by the abolition of the tax-free personal allowance, which has seen inflation-busting increases under the Conservatives over the past 10 years, but which NEF said had benefited richer households most.

For someone on £25,000 a year, the personal allowance means that the first £12,500 of their earnings, from this April, are not charged basic rate tax at 20%. This is worth £2,500. But if the same person is paid £48.08 a week instead, they will receive £2,500.16 a year, so they will be no better or worse off.

Alfie Stirling of the New Economics Foundation said: “The persistent increases to the personal allowance of income tax seen over the past decade represent one of the most expensive and regressive public spending initiatives of the 21st century so far. Costing more than the whole of defence, local government and the Department for Transport combined and enriching the highest income households almost seven times faster than the poorest.”

The leftwing thinktank, which has developed close links with Labour to become a key influencer of shadow Treasury thinking, estimates the current cost of the tax-free allowance is as much as £111.2bn.

It said the change would transfer about £8bn currently spent on tax allowances that benefit the 35% of highest income households to the rest of the country.

The policy is likely to face opposition from some voters, as it would also mean bringing down the threshold for higher-rate taxpayers from £50,000 to £37,500. This is because the starting point for 40% income tax moves with the personal allowance. NEF said this would affect the top 13% of earners in the country.

McDonnell said: “This is just the kind of innovative thinking we need on how to fix the imbalances and problems of our tax system.

“I hope it will be the start of a debate about how we make tax more progressive and deliver the public services funding that is so badly needed after nine years of austerity.”

The richest 10% of households will be £1,470 better off by 2019-20 as a result of changes to the personal allowance since 2010, compared with just £130 for each of the poorest 10% of households.

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The Treasury said the personal allowance has removed nearly 2 million people from income tax, and that income inequality in Britain is falling. In a statement, it said: “We’re raising the personal allowance one year early, which will mean that by April this year, 1.7 million income taxpayers will have been taken out of tax altogether since 2015-16.

“Our policies are highly redistributive. In 2019-20, the lowest income households will receive over £4 in public spending for every £1 they pay in tax on average, and the highest income households will contribute over £5 in tax for every £1 they receive in public spending on average.

“Income inequality is lower now than it was in 2010.”

• This article was amended on 13 March 2019. In an earlier version, one of the calculations rounded the weekly payment down to £48, resulting in a yearly total of £2,496. This has been corrected to reflect the amounts given higher up the article, of £48.08 a week and £2,500.16 a year.