Half of Army recruits have the literacy or numeracy skills of children leaving primary school, a report by the Basic Skills Agency says.
The Army is trying to improve the basic skills of soldiers
Up to half of the 12,000 recruits each year are at or below levels expected of 11-year-olds, the report says.
More than half of Army managers found the poor skill levels prevented soldiers from carrying out their jobs.
But skills Minister Phil Hope said the Army was "doing excellent work" to improve the basic skills of soldiers.
The report - Army Basic Skills Provision: Whole Organisation Approach, Lessons Learnt - found that while half of Army recruits had the basic skills of primary school leavers, up to 9% were at the lower standard expected of seven and eight-year-olds.
Rates of poor basic skills were much higher in the infantry and artillery, which set few or no academic or vocational entry qualifications, the report said.
It also found that many of the 9,500 foreign nationals serving in the British Army required additional English language training.
In a separate survey published alongside the report, the Basic Skills Agency found that 62% of Army managers said poor literacy levels hindered or stopped soldiers from carrying out day-to-day tasks.
Up to 59% of managers said they had the same experience with poor numeracy skills.
Brigadier Tony Brister, the director of educational and training services for the Army, said poor literacy and numeracy skills could mean recruits were unable to perform their roles or lead them to leave the service early.
"Poor basic skills contribute to poor self-esteem, a failure to cope with demands that others find routine, frustrated career aspirations and, along with other factors, contribute to too many individuals leaving the service prematurely," he said.
"This represents a poor return on our investment."
The report reviews the Army's experience between 2001 and 2006 and its attempts to improve skill levels among the 100,000 Army service personnel based in the UK and abroad.
Army employees are now offered training wherever they are based and take national tests. The force is aiming to hit targets outlined in a report into skills and training by Lord Leitch published in December.