Piling pressure on the Government, the think-tank says the cap should be reduced by 10 per cent – to £23,400 – for those living in the rest of the UK.
It comes ahead of a major piece of research this month examining how a future government could find further savings in the welfare budget.
The Policy Exchange paper will also say that child benefit should be capped at four childrenand payments progressively reduced after the first child.
It says the collective benefit changes would lead to savings of £1billion by 2020.
Steve Hughes, deputy head of economics and social policy at Policy Exchange, said: “Income levels and housing costs vary widely across the UK. Policymakers have been looking for ways that this can be recognised.
“Setting one benefit cap for the high income regions of London and the South-east, and one for the lower income areas elsewhere, is a solution that avoids multiple rates across the country.”
The cap affects income from the main out-of-work benefits including jobseeker’s allowance, income support, employment and support allowance, universal credit and other benefits such as housing benefit, child benefit and child tax credit.
Meanwhile, Iain Duncan Smith will argue today that the Government crackdown on benefits is slashing unemployment and will help curb immigration levels.
In a hard-hitting speech the Work and Pensions Secretary will call for a further toughening of policies in the run-up to next year’s general election.
He will argue that his controversial reforms, such as more stringent medical checks for disability benefit, have helped to drive a fall in the unemployment rate to 6.5 per cent from 7.8 per cent a year ago.
Mr Duncan Smith will also point out that a broken welfare system under Labour, combined with higher unemployment, had combined to attract migrants to Britain.
“Under the last government whole sections of society were left on the sidelines – whole communities marked by widespread worklessness,” he is expected to say.
“The number of households where nobody had ever worked doubled and the welfare bill rose by twice as much as average earnings.
“More than half of the rise in employment that we saw was accounted for by foreign nationals. And not just in London – three-quarters of Eastern European migrants in employment live outside London.”
He will add: “Immigration into the UK has been a supply and demand issue.
“Businesses needed the labour and because of the way our benefit system was constructed, too few of the economically inactive took jobs on offer.”