Chancellor Philip Hammond said the scheme could offer three million high-cost credit users a more affordable alternative, prevent them falling into problem debt and stop them turning to loan sharks.

A similar scheme in Australia has helped four out of five people stop using payday loans.

The UK government, along with leading debt charities and the banking industry, will undertake a feasibility study next year to see how a pilot could work in the UK.

Budget 2018 documents revealed the government will also consult on extending the ‘breathing space’ scheme – giving people in problem debt legal protections from creditor action. It hopes to introduce a 60-day period of protection extending this from six weeks to give people more time to get their finances back on track.

Another policy to help people in problem debt is the launch of a £2m prize for entrepreneurs who can come up with ideas to get people to borrow from more affordable lenders.

High-cost credit is often quick and easy to access, but isn’t always the best value so other lenders, particularly credit unions, are overlooked and struggle to compete.

Gillian Guy, chief executive of Citizens Advice, said: “Improvements to the breathing space scheme and a proposal for an interest-free-loan scheme are welcome news from the Treasury.

“We expect this lead to be a call to action to the public and private sectors, and to regulators, to tackle the misery of debt and help more people who are forced to turn to high-cost credit.”