If we ditch the 5% threshold, the lowest you can go is the "natural" threshold. If we stuck with a 120 seat house that is ~0.83%.
You then either ignore the votes that were for parties below the threshold; or change the voting system to STV or similar.
I would be in favor of dropping the 5% to say 2-2.5% and bringing in some form of ranked choice, along with lowering the voting age. All this with upping (significantly) the civics education in schools, to get more people voting.