In a big blow to many households without TVs, Culture Secretary John Whittingdale said that he would bring forward legislation swiftly to allow the Corporation to charge for the first time for those who replay programmes on demand.
As part of the plan to let the BBC recoup £150m in losses caused by iPlayer catch-up, many younger Britons who watch the BBC on their laptop or tablet will now face the annual fee or face prosecution.
However, Mr Whittingdale said that decriminalising non-payment of the licence fee will be "carefully considered" by the government this summer.
The crackdown on the iPlayer loophole is part of a controversial deal that will allow the BBC to recoup some of the cash it will lose from having to foot the bill for free TV licences for the over-75s.
The Culture Secretary told MPs that the BBC taking over the £650m cost of the free licences would be phased in from 2018-19 with the corporation bearing the full cost by 2020-21.
Labour's Shadow Culture Secretary Chris Bryant attacked the plans as 'shabby backroom deal', while Former BBC reporter and Culture Secretary Ben Bradshaw also rounded on the announcement, claiming it was "a significant assault on BBC independence".
Former Guardian editor Peter Preston claimed the BBC had given in to Tory 'bullying'.
Journalist Peter Oborne managed to get a quote out of BBC Political Editor Nick Robinson on the reason for the deal.
It was unclear how the BBC would tackle the practicalities of making people pay for iPlayer, although it could adopt a scheme to insert a particular licence fee code to allow access.
However, some on Twitter made ironic reference to the fact that the days of free iPlayer were numbered.
Mr Whittingdale said that when the licence fee was originally devised, the BBC could not have envisaged that technology would one day allow viewers to watch the same programmes on demand after they were first broadcast.
"It is merely to reassert that principle that the Government has agreed that we should change the law so that in future catch-up TV is treated in exactly the same way as live TV in terms of the requirement to pay a licence fee."
Director-General of the BBC, Tony Hall, issued a statement making clear he had signed up to the plans, in return for an agreement that the licence fee could go up in line with inflation:
“We have secured the right deal for the BBC in difficult economic circumstances for the country. This agreement secures the long term funding for a strong BBC over the next Charter period.
"It means a commitment to increase the licence fee in line with inflation, subject to Charter Review, the end of the iPlayer loophole and the end of the broadband ringfence. In the circumstances, the BBC has agreed take on the costs for free licence fees for over-75s, and after the next parliament, will take on the policy."
Mr Bryant said that the Government's decision to announce its plans ahead of the usual 'BBC Charter Renewal' process was "no way to run a whelk stall let alone the world's most respected broadcaster".
But Mr Whittingdale said he was pleased "the BBC had agreed to play its part" in helping tackle the government's "challenging fiscal position" while further reducing its "reliance on taxpayers".
A string of Tory backbenchers got up in the Commons today to attack the BBC, with Philip Davies saying the Corporation had for years been 'sucking on the teat of the licence fee payer' while spending freely.
George Osborne yesterday accused the BBC website of having 'imperial' ambitions and of harming newspapers, and Tory MP Michael Ellis described the online service as 'overweening'.
Nigel Evans attacked the Corporation for huge salaries paid to stars like Jonathan Ross and rounded on claims that Chris Evans would have a bumper pay packet for the new Top Gear.
Mr Whittingdale said he had ‘sympathy with the views expressed' about "eye watering" BBC salaries. "Obviously, the BBC will have to cut its cloth to live within its means," he said.
However, BBC Trust chairwoman Rona Fairhead has written to George Osborne and to Mr Whittingdale to object to the lack of consultation of licence fee payers.
"We accept this decision is a legitimate one for the government to take, although we cannot endorse the process by which it has been reached ... The trust has a specific duty to represent the interests of licence fee payers. We are disappointed that they have not been given any say in the major decisions about the BBC’s future funding," she wrote.
The Chancellor issued his own statement: "The BBC is a valued national institution that produces some of the finest television and radio in the world. But it is also a publicly-funded body, so it is right that it, like other parts of the public sector, should make savings."