The tax disc, which has been in service since 1921, will be scrapped next year and replaced with an electronic system, Chancellor George Osborne is set to announce in his Autumn Statement.
A new system will allow motorists to pay their vehicle excise duty by monthly direct debit. A Treasury spokesperson said the move would make "dealing with government more hassle free."
As present, motorists have a choice between paying for six months of VED or twelve, with a 10 per cent charge added for drivers who choose the former. This price difference is expected to be reduced to 5 per cent under the new plans.
The changes are due to come into effect in October 2014.
With modern Automatic Number Plate Recognition (ANPR) able to detect whether or not a car is taxed instantly, the retirement of the tax disc is a logical move and is expected to save up to £7million annually.
The Treasury claims the plans show the government is moving "into the modern age".
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