Philip Hammond has been urged to scrap billions of pounds in tax relief for entrepreneurs, labelled the “worst tax break” in Britain for helping just a few wealthy individuals, and use the proceeds to increase spending on the NHS.

The Resolution Foundation thinktank called on the chancellor to abolish entrepreneurs’ relief in the autumn budget later this year, generating annual savings of around £2.7bn that could be spent on the health service.

Taxpayers are expected to face increases when the chancellor delivers his budget, despite an improving picture for the public finances giving him greater capacity to raise spending on public services.

While the government has committed to find ways to finance a £20bn-a-year injection of extra cash into the NHS by 2023-24, other departments are also clamouring for funds after almost a decade of austerity.

First introduced by Labour under Gordon Brown a decade ago, and then aggressively expanded by the Conservatives, entrepreneurs’ relief is designed to encourage people to start small businesses. The policy allows people selling their firm to pay half the normal rate of capital gains tax, up to a lifetime limit of £10m.

There have been warnings in the past that crimping entrepreneurs’ relief could put investors off backing young companies. However, the Resolution Foundation said the scheme was expensive, regressive and ineffective.

Initially designed to cost around £200m a year, the expansion of the tax break introduced by George Osborne during the coalition years, and greater-than-expected use, has meant actual spending on the relief has ballooned by 10 times to more than £2bn.

The Resolution Foundation said this was more than the entire annual budget for the intelligence services and enough to give £100 to every household in the country annually.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

The thinktank said about 52,000 individuals benefited from the tax break in 2015-16, but the financial gain was concentrated among a few very wealthy individuals, with about 6,000 claiming more than £1m each. About 82% of the beneficiaries were men with a typical age of 57.

The cumulative cost in the past decade of the tax break has been about £22bn without serious evaluation of its effectiveness, yet most entrepreneurs claiming the relief say they were unaware of it when they started their company, according to the foundation.

Adam Corlett, a senior economic analyst at the Resolution Foundation, said: “As the Treasury wrestles with how to raise revenues to fund the prime minister’s pledge of £20bn for the NHS, they should start by scrapping this expensive, regressive and ineffective tax relief.”