Announcing the news, Tessa Jowell, secretary of state for culture, media and sport, said it would enable the BBC to provide a "strong and distinctive schedule" and enable the broadcaster to remain at the forefront of technology.
The BBC will use part of the increase to help fund the digital switchover, scheduled to happen between 2008 and 2012, while the rest of the money will be spent on reducing repeats and developing high-definition television.
Mark Thompson, BBC director-general, defended the price hike saying: "The BBC will seek to ensure it makes savings, meeting the government's targets for efficiencies."
The corporation announced last year it was axing 3,780 jobs as part of its money-saving scheme.
Rupert Murdoch, News Corporation chairman, publicly attacked the BBC in an interview yesterday when questioned about the corporation's request for the licence-fee rise.
Murdoch said: "I can't believe what the BBC is doing with a lot of the surplus money it has.
"It's even starting websites against local newspapers all over the country. That's not necessary. They are not improving any services. They are trying to put out of business, it seems, a lot of small, medium-sized businessmen."
Last year, as part of its review, the BBC called for a licence fee hike of £3.14 a year excluding inflation. This could take the current fee of £126.50 to £183 by 2012 and was criticised by the Conservative Party as a "stealth tax".
The report said that the BBC's current bid is "particularly high because the government expects the BBC to fund a significant proportion of the costs of analogue switch-off".
The House of Lords select committee said it saw no reason why the licence fee-payer should foot the bill because they already face covering the costs of replacing their analogue TV sets and recorders.
The committee also opposed the hike saying "it will particularly hurt low-income households".
It recommended that the government, which would earn up to £2bn from selling the analogue system, should fund a significant proportion of switchover.
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