Insurance companies rather than individuals will be liable for claims in those circumstances, the Department for Transport said (DfT).
The update to the Code will make it clear that motorists must be ready to take back control of vehicles when needed.
The DfT also intends to allow drivers to watch television programmes and films on built-in screens while using self-driving cars.
It will still be illegal to use a phone behind the wheel.
These measures – which follow a public consultation – were described as an interim measure by the Government to support the early deployment of self-driving vehicles.
A full regulatory framework is expected to be in place by 2025.
There are no vehicles approved for self-driving on Britain’s roads, but the first could be given the go-ahead this year.
The DfT announced in April 2021 it would allow hands-free driving in vehicles with lane-keeping technology on congested motorways.
Existing technology on the market such as cruise control and automatic stop/start is classified as “assistive”, meaning users must remain fully in control.
Transport minister Trudy Harrison said updating to the Highway Code will be a “major milestone in our safe introduction of self-driving vehicles”, which she claimed will “revolutionise the way we travel, making our future journeys greener, safer and more reliable”.
She went on: “This exciting technology is developing at pace right here in Great Britain and we’re ensuring we have strong foundations in place for drivers when it takes to our roads.
“In doing so, we can help improve travel for all while boosting economic growth across the nation and securing Britain’s place as a global science superpower.”
The development of self-driving vehicles could create around 38,000 new jobs in Britain and be worth £41.7 billion to the economy by 2035, according to the DfT.
Steve Gooding, director of motoring research charity the RAC Foundation, said driverless cars “promise a future where death and injury on our roads are cut significantly” but there is likely to be a “long period of transition” while drivers retain “much of the responsibility for what happens”.
He stressed the importance of changes to regulations being communicated to drivers.
“Vehicle manufacturers and sellers will have a vital role to play in ensuring their customers fully appreciate the capabilities of the cars they buy and the rules that govern them,” he said.