From October this year, candidates will pay £25 - a cut of £6 on the existing charge of £31, with a further drop, of £2, taking effect from October 2015.
Fees for motorcycles and other categories of vehicle will also be reduced.
Transport Minister Stephen Hammond said: "We want to keep costs down for all motorists - that's why we have frozen fuel duty - and by reducing the cost of the theory test we will save aspiring motorists around £9 million annually.
"This has been achieved without compromising on the vital role the theory test plays in making sure that new drivers know the Highway Code and the rules of the road. I am delighted that theory tests will now offer better value for money while continuing to meet these rigorous standards."
Driver and Vehicle Standards Agency chief executive Alastair Peoples said: "By agreeing new contract arrangements for the delivery of theory tests we have secured significant cost savings, and it is right that we pass these savings on to our customers."