Culture Secretary Lucy Frazer warned on Thursday night that sending TV licence defaulters to jail is “morally indefensible”.
She made the comments in the wake of the £10.50 rise in the licence fee - lower than the BBC had requested.
In an article in the Daily Mail, she wrote that a review into its funding model will “specifically look at the issue of criminal prosecution of the licence fee.”
Findings show nearly 1,000 people are prosecuted every week for failing to pay their licence fee, with 70 per cent of women getting fined.
The offence is now one of the most common crimes in Britain, excluding motoring offences.
The BBC licence fee will rise by more than £10 next year, the Culture Secretary announced on Thursday.
The payments, which have been frozen for two years, will rise in 2024 from £159 to £169.50, Lucy Frazer confirmed.
The BBC had expected the increase to be around £15 in line with nine per cent inflation, presenting the corporation with an unexpected budget shortfall.
But Ms Frazer said the Government had acted to prevent such a steep increase, and would seek to reform the “anachronistic” funding model and reduce the financial burden on the public.
Ms Frazer stated that continued hikes could not continue “indefinitely” and announced a review to explore alternatives to the licence fee.
Speaking in the House of Commons, the Culture Secretary announced that “next year’s licence fee increase will be kept as low as possible”.
She said: “In April the licence fee will rise by 6.7 per cent to £169.50 annually. This will minimise the rise for households, keeping it to £10.50 over the year.”
The number of licence fee-paying households fell by 400,000 last year, according to Ms Frazer, as many viewers turn to subscription-based competitor services such as Netflix.
She suggested the “increasingly anachronistic” levy required reform, announcing that a Government review of the licence fee model would examine a “range of options for funding the BBC”.
She added: “The review will include looking at how the BBC will increase its commercial revenues to reduce the burden of licence fee payers.”
BBC funding concerns
It is understood that all options will be on the table ahead of a report being completed in autumn 2024, with a subscription-based model likely to be considered.
Tory MP Sir Peter Bottomley, the head of the all-party Parliamentary group for the BBC, has suggested that reforming the licence fee into a means-tested tax could be an option.
BBC insiders have suggested an advertising-based model would likely result in the corporation taking the advertising revenue currently going to other broadcasters.
They also fear that a subscription model might risk the BBC dominating commercial TV in the UK, and attracting subscribers who might otherwise have gone elsewhere.
The corporation is reportedly concerned that any shift to a purely commercial footing would narrow its offering and appeal.
A statement from the BBC Board said: “We note that the Government has restored a link to inflation on the licence fee after two years of no increases during a time of high inflation.
“The BBC is focussed on providing great value, as well as programmes and services that audiences love. However, this outcome will still require further changes on top of the major savings that we are already delivering.
“Our content budgets are now impacted, which in turn will have a significant impact on the wider creative sector across the UK. We will confirm the consequences of this as we work through our budgets in the coming months.”