Universal Credit rules are not fit for real life and create barriers to some people getting work, according to Citizens Advice.
It said urgent changes are needed to stop those most impacted by the pandemic being left behind as the economy recovers.
The charity said its frontline advisers have seen hundreds of cases where the rules in Universal Credit are making it harder for people to find work.
This includes a parent considering an expensive loan to meet the up-front costs of a nursery place in order to work because Universal Credit will reimburse the fees retrospectively.
Another staff member supported a domestic abuse survivor who spent up to 40 hours a week job hunting after pressure from their work coach, despite suffering acute distress and anxiety, Citizens Advice said.
Nearly two-thirds (62%) of unemployed people on Universal Credit said they were not confident of finding work in the next six months, the charity found.
Nearly nine in 10 (88%) Universal Credit claimants reported their financial situation is having a negative impact on their mental health.
Kat Kryvokhat’ko-Furlong, an adviser at Citizens Advice Southwark, said: “The longer you’re out of work, the harder it is to get back in. After a while people can lose confidence. They get ground down from being asked to apply for jobs that aren’t suitable and it leaves them feeling really hopeless.
“It’s particularly a struggle for people with a gap in skills or who may need flexibility because they’re disabled or have children to care for. A one-size-fits-all approach when it comes to job-seeking just doesn’t work.”
Citizens Advice said it has supported more than 450,000 people with one-to-one advice on Universal Credit since March last year.
It said it wants changes to ensure the rules are fit for real life. This includes greater flexibility from work coaches to ensure that people are not given unsuitable job-seeking requirements.
The charity is also calling for the removal of barriers faced by disabled people and parents by providing childcare costs upfront and reviewing eligibility rules for disability work allowances.
Dame Clare Moriarty, chief executive of Citizens Advice, said: “This has been an unequal crisis and we now face an unequal recovery, with those hardest hit by the pandemic facing an uphill struggle to find work.
“As the economy reopens, the Government has a crucial opportunity to prevent irreparable scarring from this crisis.
“Key to this will be making sure the rules in Universal Credit are fit for real life. That means supporting people into work, not pushing them into unsuitable jobs or adding to their stress and worry with the threat of sanctions.”
A spokesperson for the Department for Work and Pensions said: “Universal Credit is designed specifically to help people into work and in tandem with our £30 billion Plan for Jobs is doing exactly that. Claimants receive individual tailored support and regularly discuss their Claimant Commitments as well as their individual support needs, with their Work Coach.”