Q&A: BBC licence fee

But what is the purpose of the licence fee, and what will the repercussions be for the BBC?

What is the licence fee?

The BBC is owned by the British people and run on their behalf.

The corporation is funded directly by the licence fee, which is paid by every UK household with a television, with different prices for colour and black-and-white sets.

A licence currently costs £131.50 for a colour television and £44 for a black-and-white set.

BBC radio services can be received without a licence.

The government sets the cost of the licence as part of the BBC's royal charter, which defines the corporation's functions and objectives.

Why has this announcement been made now?

The government has announced the cost of the licence for the next six years following the latest charter review.

A new charter, which runs until the end of 2016, came into effect at the beginning of the year, with the final element - the funding settlement - applying from the start of the new financial year in April.

The previous settlement saw the licence fee rise by 1.5% above inflation every year.

The first royal charter was granted in 1927, and has been reviewed roughly every ten years.

What is the settlement?

The TV licence fee will rise by 3% over each of the next two years, then by smaller amounts up to a maximum price of £151.50 in 2012.

Culture Secretary Tessa Jowell said the deal would allow the BBC to maintain all its current services and provide up to £1.2bn for new activities.

It would also pay for the relocation of departments including the BBC sports and children's departments, involving some 1,500 jobs, from London to Salford.

Ms Jowell said the corporation would also get a 12.5% increase in its borrowing capacity to help deliver the switchover from analogue to digital TV, due to be completed by 2012.

The 3% licence fee rise over the first two years is at the level of inflation as measured by the Consumer Price Index, but below the Retail Price Index figure of 4.4%.

How much money did the BBC want?

The corporation initially sought an annual licence fee rise 2.3% above inflation, which would have taken the price to £180 by 2013. The demands were criticised by rival broadcasters as excessive.

The BBC later lowered its bid to 1.8% above inflation.

But it said it needed an above-inflation rise to pay for more original programmes, new digital and local services and increased costs.

What effects could the settlement have?

Ms Jowell said the settlement would provide the BBC with "stability and certainty over the crucial period of digital switchover".

But she called on the BBC Trust, the corporation's independent governing body, to deliver the best possible value for the investment.

Director general Mark Thompson said the quality of BBC services would not be harmed

But he said the "disappointing settlement" would force "some quite tough choices".

"The challenge is how do we maintain and improve the quality of existing services but also plan for the future."

He added: "The case the BBC made clearly fell on deaf ears."

Unions have warned that a below-inflation deal would hit programmes and lead to "heavy job losses" at the BBC.