Culture Secretary Tessa Jowell said the fee would increase from $259 to $267 April 1, then rise gradually to a maximum $299 in 2012, the BBC said Friday.
BBC director-general Mark Thompson called the deal "disappointing." The BBC had wanted a higher increase to cover costs and a switch to digital.
"It doesn't mean we can't carry on with our exciting plans for the future, but it means we face some quite tough choices," Thompson said.
Jowell said the license fee settlement will allow the BBC to maintain its current services and provide up to $2.3 billion for investments, as well as allow the planned move of key departments from London to Salford, Greater Manchester, England.
Jowell said the BBC would receive a 12.5 percent increase in its borrowing capacity to help in the digital switch.
The settlement provides "stability and certainty over the crucial period of digital switchover," she said.
Notable deaths of 2014 [PHOTOS]