A universal credit system will restore "fairness and simplicity" to the welfare system, Work and Pensions Secretary Iain Duncan Smith has said.
He told the Conservative conference he would replace the "complex, outdated and wildly expensive system" of multiple benefits with a single credit.
The amount received will taper off gradually once people return to work and their salaries increase.
The reforms are designed to cut long-term welfare dependency and fraud.
Mr Duncan Smith also announced the creation of an enterprise allowance to help those starting new businesses.
He said anyone unemployed for six months who wanted to start their own company would be offered mentoring and a financial package worth up to £2,000 to get a new venture up and running.
With the help of the allowance, Mr Duncan Smith said he wanted to see 10,000 new small businesses created by next year.
Under the universal credit, claimants will get a single payment, instead of potentially several, separate payments as happens currently.
Disability living allowance, however, is expected to remain separate, with the new system allowing carers to take part-time or short-term work without losing their benefits.
It is hoped that by tapering off the credit gradually once people return to work they might be less likely to reject low-paid or short-term jobs.
Mr Duncan Smith said he was making a "contract" between himself and the unemployed, but while the new system would be fairer, "fairness must be a two-way street".
"We will break down the barriers to work and ensure work pays but in return, we have the right to insist that when work is available you take that work and work hard to keep that job," he told delegates.
"For those who want to choose not to work, under this government this will no longer be an option."
He also said those were "genuinely sick, disabled or are retired... have nothing to fear".
"We will crack down on fraud and help able people off welfare. This means we will have enough resources to provide peace of mind to the very vulnerable."
Speaking before the work and pensions secretary, welfare reform minister Lord Freud said that under the universal credit there would be a single point of entry into the benefits system for everyone. Individuals would then have their needs assessed and money allocated accordingly.
Lord Freud said the new system would be ready to accept entrants by the end of 2013 and the hope was to have a large number of people transferred to it by the end of this Parliament in 2015.
The peer, who has also advised Labour, said the previous government "chickened out" of tough decisions on welfare.
"They just did not have the determination to do it. These are huge changes, they're 'once-in-many-generations' changes."
Work and pensions minister Chris Grayling said it was hard to put a figure on the number of people the government expected to get back into work, but of the 2.5 million currently on incapacity benefit, he hoped it might be at least half.
Calling for cross-party support for Mr Duncan Smith's plans, Mr Grayling told the conference: "There is a simple issue for the Labour Party here. The nation wants this change.
"If they oppose it, they are the ones who will be out of touch and it will do them damage. So if they have any political sense whatsoever they will row in behind it."
Mr Duncan Smith has been in negotiations with Chancellor George Osborne for several months in order to secure funding for his radical plans.
In his speech, he referred to Mr Osborne's announcement on Monday about reforms to the child benefit system and insisted they were "tough, fair and right".