Chancellor George Osborne has pledged to raise the small claims limit for personal injury claims to £5,000 and scrap general damages for ‘minor’ soft tissue injuries.

In surprising moves that will be met with dismay by personal injury lawyers, Osborne said he would remove legal costs by transferring personal injury claims of up to £5,000 to the small claims court.

He will also end the right to cash compensation for ‘minor’ whiplash claims.

In his speech to House of Commons, Osborne said: ‘We’re going to bring forward reforms to the compensation culture around minor motor-accident injuries.

‘This will remove over £1bn from the cost of providing motor insurance. We expect the industry to pass on this saving, so motorists see an average saving of £40-50 per year off their insurance bills.’

The full statement said the government is ‘determined’ to crack down on the fraud and claims culture in motor insurance. It added: ‘Whiplash claims cost the country £2bn a year, an average of £90 per motor insurance policy, which is out of all proportion to any genuine injury suffered.’

The government opted not to increase from £1,000 to £5,000 in 2013 after being warned against the move by a report of the transport select committee.

The spending review statement said the government intends to introduce measures to end the right to cash compensation for minor whiplash injuries, and will consult on the details in the new year.

Huw Evans, director general of the Association of British Insurers, said: ‘This is a significant breakthrough in tackling the compensation culture and is good news for motorists. Insurers have long called for meaningful reform in reducing costs in the compensation system, including increasing the small claims track limit.

‘Previous government reforms have already led to insurers passing on over £1bn in savings to motorists through lower premiums, and in a highly competitive motor insurance market, insurers will continue to pass on savings to customers.’

Jonathan Wheeler, president of the Association of Personal Injury Lawyers, said the insurance industry had failed in the past to live up to promises to pass on savings from reforms to customers.

He added that since the overhaul of overhaul of medical reporting and establishment of a portal for claims, whiplash claims have fallen by more than a third.

He added: ‘Only two years ago the government ruled out increasing the small claims court limit because there were no adequate safeguards to protect genuine claimants. There are still no adequate safeguards.

‘If the small claims court limit is raised to £5,000 all that will happen is that genuine victims of injury will not be able to afford the legal help they need to bring genuine claims and there will be an epidemic of cold calling from claims management companies as they rush to take advantage of vulnerable people who won’t be able to afford legal representation.’

Wheeler said the removal of damages would show a ‘callous indifference’ to the suffering of victims.

Sue Brown, chair of the Motor Accident Solicitors Society, said the NHS and benefits system will be left to pick up the bills currently met by insurers.

‘A substantial increase in the small claims limit and the removal of the right to claim general damages for low value whiplash will have a hugely detrimental impact on the ability of accident victims to seek redress and justice,’ she said.

‘It cannot be right to deal with the purported compensation culture by removing the right to claim compensation from those who suffer injury as a result of negligent driving, in order that the insurers for the negligent driver can save money.’