Fears those too ill to work will be unable to meet basic living costs as government limits contributory allowance to 365 days

It all began with a telephone call. Earlier this month, Malcolm Parker, who has not worked since his spine collapsed three years ago, was rung out of the blue by an official from the Department of Work and Pensions. There was only one question: did his wife work more than 24 hours a week? Yes, said Parker, reasoning honesty was the best policy.

A fortnight later a letter dropped on the Parkers' doormat. The department wrote bluntly to say his contributory employment and support allowance (ESA) would disappear on Monday.

Parker was taken aback. Having worked for 44 years in the construction trade and diligently paid his national insurance, he had expected to be protected should the worst happen. His wife Ruth was at first perplexed and then increasingly angry. Although her husband can visit the toilet by himself, with some difficulty, she comes home every lunchtime to feed and check on him.

"Malcolm is in a wheelchair. He's 62. He can't drive. He can't concentrate and gets horrendous headaches because of the medication he's on. He really cannot have a long conversation. To be honest he spends a lot of time on the sofa. I can't see how he could work."

She says the £99 a week her husband received from the state was a "lifeline. It's not right that Malcolm paid into the system and now he needs help it is not going to pay out."

This week, about 70,000 seriously ill, disabled people will lose some or all of their £99-a-week allowance, in perhaps the most swingeing welfare cut proposed by ministers.

In the past the public were told that by paying into national insurance, they would be guaranteed benefits should they find themselves unable to work due to sickness or disability.

From Monday, the government will limit receipt of the contributory allowance to just 365 days. It marks the end of a welfare state that rested on William Beveridge's central idea that social security was "first and foremost a plan of insurance – of giving in return for contributions benefits up to subsistence levels". It's what Labour leader Ed Miliband calls the "something for something" welfare state.

Instead the government aims to test claimants' ability to work "some time in the future" using the controversial work capability assessments (WCA). If a disabled person is judged to be able to do some "work-related activity", then the household is means-tested for contributory benefits. In the Parkers' case, Malcolm has been put in the "work-related" category and the new regulations mean Ruth's full-time work – as an accounts manager in a solicitors' firm earning £33,000 a year – rules out any benefits.

"How would we manage if I were to stop working?" says Ruth. "There's a mortgage still to pay. We should move into a bungalow because Malcolm can't climb stairs. But we cannot get another mortgage. At this rate we'll end up in a mobile home."

By 2015 almost 300,000 people will lose out – saving the public purse almost £2bn a year. It will also mark the end of the idea that the welfare state is a piggy bank to be emptied in hard times. Citizens Advice chief executive Gillian Guy calls this a "betrayal" and argues for a rethink.

"About 300,000 people will be losing almost £100 a week even when they continue to be assessed as being too ill too work. Citizens Advice bureaux are already seeing clients worried about being able to pay their mortgage or meet basic living costs," she says.

"Many of those affected have paid national insurance all their lives – sometimes over three or four decades – believing that this will protect them if they become too ill to work. They are feeling very betrayed and frightened by what seems a very unfair change."

Mark Young, 54, had to leave his job in a foundry after falling and shattering his kneecap. Convinced he would return to his job, he instead ended up "marooned and isolated", unable to work for three years – his first spell of unemployment since he was 20.

Within weeks of an operation, his broken knee got infected and Young found himself incapacitated, swiftly losing confidence. He put on weight and began to feel afraid to leave the house alone. His wife's earnings of a little over £10,000 a year means the household income is too high, under the new rules, to continue to get the benefit.

Young says: "I have been on ESA for 18 months. I get disability living allowance. I want to work for my own sanity. But my condition means I need to keep my legs raised. What job can I do with my feet on the desk?

"We need the money. I can't sleep thinking about it."

Perhaps the most concerning aspect of the welfare cut is that in an age of austerity stress and anxiety spreads through the population. For those who are depressed, the danger is that cutting benefits can jeopardise recovery and risks pushing people away from work.

Paul Farmer, chief executive of the mental health charity Mind – who earlier this month quit the government advisory panel responsible for monitoring the WCA – warned: "Most people with mental health problems need longer than 12 months of support before they are ready to seek employment. It is very alarming therefore that thousands of people are going to have this support cut off, putting a huge financial strain on them as well as on their families."

Jenny Wheatley was signed off sick from work with "anxiety and depression" in January 2011 and was made redundant on medical grounds two months later. She got a letter last month saying her ESA would end, as her husband earns £18,000 a year.

"I called them and was basically told that I couldn't claim income support as my husband is trying to keep us afloat. Because of this I can't claim jobseekers' allowance or any other benefit and, in the operator's words, 'your husband will have to support you'," she says.

Wheatley faces having to live off the family's meagre savings. "We don't go on holiday. It makes me really angry. I have an illness you cannot see. I am not sitting on my backside watching Jeremy Kyle."

Many experts question the limit of 365 days, which is double that given to able-bodied people claiming jobseekers' allowance, but which, they say, does not recognise how difficult it is for disabled people to find a job, especially in a recession.

According to the government's own estimates, 94% of people in the "work-related group" on contributory ESA will continue to need support for longer than 12 months. Stephen Timms, Labour MP and the party's welfare spokesman, said two years was a "more realistic timeframe".

The government said a two-year cut-off would cost taxpayers £2bn. A spokesman for the DWP said: "The time limit of one year strikes the best balance between recognising that some people need extra help to enter the workplace and that the taxpayer cannot afford to support people indefinitely who could return to employment."

Campaigners say many claimants are often assessed incorrectly and that the government should accept that many sick and disabled people have such severe health problems that there is no current prospect of their being able to undertake work or work-related activities.

Such was the outcry when it emerged that seriously ill cancer patients will be forced to take medical tests and face "back to work" interviews, despite assurances from ministers that they would not make it harder for the sick to get welfare support, that in the face of strong opposition in the House of Lords the government accepted that some conditions would need "monitoring".

The cut will also disproportionately affect those least able to afford it as the poor spend more of their lives with a disability. The average difference in "disability-free life expectancy" is now 17 years between those at the top and those at the bottom of the economic ladder.

Neil Coyle, director of policy at Disability Rights UK, says "unfairness will undo the policy". He points out that under the new rules even average earners will pay in more in taxes annually (£5,800) than they will be able to take out in ESA (£5,200) in the event of being disabled.

"When the public see who is affected, then the government will lose support for this policy. Is it fair to give you back less in support than what you paid in a year?"