Martin Precious, 60, was a hairdresser at a high-end London salon with celebrity clients until severe depression forced him to give up his job. After trying to manage his illness for five years, he was referred to hospital for treatment. It was then that he was put in touch with Oxfordshire Mind's Benefits for Better Mental Health (BBMH) service after having problems accessing his benefits.

BBMH provides specialist benefits advice and casework for people with mental health problems, and aims to remove financial uncertainty for vulnerable people worried about their income. "I did what I was advised to do and everything was back in place. Suddenly the anxiety just went away completely," says Precious.

BBMH has helped 3,800 people such as Precious claim more than £5m of benefit entitlements since it was established in 2008.

Now Oxfordshire Mind has been awarded a six-figure sum from the Big Lottery fund to enable the service to expand to specifically cope with the fallout from the government's welfare reform programme. The BBMH hotline has received 20% more calls over the past 18 months from people anxious about benefit changes.

Patrick Taylor, chief executive of Oxfordshire Mind, says: "This money is incredibly important. It's important that people aren't struggling on their own."

Last year, Mind nationally reported a 50% rise in calls to its support service, Mind Infoline, with callers experiencing severe financial worries. Online traffic to its welfare advice page also increased markedly. There is well documented evidence of financial difficulties exacerbating mental ill health and of people with mental health problems facing a high risk of poverty.

The £336,078 Big Lottery grant acknowledges a link between welfare reforms and mental health problems. Big Lottery fund spokeswoman Alison Rowe says: "It may be difficult enough for affected people to navigate through the welfare financial changes and budget accordingly, without having additional mental health problems on top. This targeted service by Oxfordshire Mind will respond to a real need from people who are worried about the transition, and provide informed advice and vital peace of mind."

The BBMH service has been pushed to the limit by the increased workload caused by appeals against the work capability assessment (WCA). It has a startling 98% success rate in appeals for its clients against fit-for-work rulings. The lottery funding will allow it to employ another full-time adviser and to train more volunteers to run their hotline. "Over the past two years our resources have had to shift massively into supporting people through appeals. That's time-consuming, complex and detailed work," says Taylor.

According to David Bryceland, BBMH's project manager, its success rate at appeal is so high because of the poor quality of decision-making by assessors employed by Atos – the firm contracted to carry out the WCA tests – who he says aren't trained in mental health.

"The assessment itself is flawed because you're asking someone to go in and speak to a complete stranger about their most personal fears," Bryceland says. "They don't want to admit that they haven't washed in five days or that they've spent half their day in the corner of the room because they're so paranoid the police are coming to get them."

Clara Smith, 40, has bipolar disorder and turned to the BBMH team six years ago. She now claims employment support allowance and disability living allowance, but believes that having to regularly resubmit her claim to the Department for Work and Pensions (DWP) prevents her from having a positive attitude to her recovery. "Every single negotiation with the DWP is saturated with the most mind-bending anxiety because they treat you like a criminal from the word go," she says.

Bryceland explains: "A lot of the recommendations from Atos reports say things like 'this person will be fit to return to work within six months'. When they have a long-term mental health condition, that sort of statement is both manifestly incorrect and quite damaging to the person. When they read that they think, 'How am I going to be able to manage that?'."

Last year, the court of appeal upheld a ruling that the WCA disadvantages people with mental health problems. Oxfordshire Mind is calling for it to be scrapped altogether.

The DWP insists that Atos staff have received training in assessing mental health conditions. A DWP spokesman says: "We have made – and continue to make – significant improvements to the WCA process specifically for people with mental health conditions. We're committed to helping people who are capable of work get off benefits, while giving unconditional support to those who need it."

While in recovery, Precious began to volunteer on the BBMH hotline, and in 2010 he was hired as a full-time adviser helping people with similar financial worries. Many people are anxious about losing their income altogether, he says. "I know from personal experience that when that issue is resolved suddenly the world doesn't seem so bad. It enables you to focus on your recovery."

• Some names have been changed