A review will be conducted in 2015 to prepare the legislative and regulatory framework necessary for such vehicles to be allowed on Britain's roads, the Treasury announced in its National Infrastructure Plan.
A $16 million prize would be created to fund a town or city willing to become a testing ground for autonomous vehicles, officials said.
In the United States Google has created a self-drive cars that has completed 500,000 miles of road tests, and California, Nevada and Florida have passed legislation to allow driverless cars.
Brad Templeton, a software engineer involved in the Google project, said he sees a future where people will not own cars, but rather summon one when needed.
"I call it mobility on demand," he told the BBC. "You pop out your mobile phone, say where you want to go and how many people and in a short amount of time a vehicle rolls up."
In Britain, the city of Milton Keys is experimenting with driverless transportation pods and plans to have 100 fully autonomous vehicles running on the town's pathways by 2017 along with pedestrians, using sensors to avoid collisions.