Drivers will be able to leave the paper sections of their licence at home from 2015.
Moving all driving records online could reduce the cost of car insurance, ministers have said.
The migration, which will be complete by mid-2015, will end the need for the "paper counterpart" document drivers have to keep with their licence.
Insurers have said many motorists could see premiums fall by up to £15 a year.
At the moment, insurers cannot check licence or traffic offence details when they sell policies, meaning they have to "price in" risk factors.
The Association of British Insurers says premiums are pushed up by the fact that firms have to take account of the risk that drivers either do not tell the truth about speeding points to get a lower quote, or simply make a mistake.
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Most of us would struggle to find the official document we are meant to keep with our driving licence. But from the middle of next year we will not need to.
All the information on it - such as speeding points - will be available online. It is one of 25 public services set to go digital by 2015.
Cabinet Office minster Francis Maude says the days when government IT projects were a by-word for disaster are over.
Britain now leads the world. And it has already saved taxpayers more than a billion pounds a year.
But critics point to universal credit.
The government's flagship welfare reforms rely heavily on new IT systems - and these have been hit by cost over-runs and delays straight from the bad old days.
A system due to be launched by the Driver and Vehicle Licensing Agency (DVLA) will allow them to access the information through the gov.uk website using an individual's licence number, national insurance number and postcode.
Car hire companies will also have their overheads reduced through being able to check drivers' details online rather than by phone.
Cabinet Office minister Francis Maude said anyone with a driving licence would be able to use the online database while there will be an assisted service for those who find it difficult to use the internet. They will be able to get help from a call centre, library or post office.
Most of the UK's 40 million drivers would see falls in premiums, he suggested.
"This will enable insurers, for example, to price much more accurately, because they will not have to take anything on trust," he said.
Driving records are one of 25 public services set to go digital by 2015, with Mr Maude claiming the UK now leads the world in online migration of public services.
The paper counterpart to the driving licence photo card is due to be phased out by 2015 while it was announced recently that car tax discs would also be scrapped.
The DVLA said that "although some services cannot be delivered digitally, such as assessing a customer's fitness to drive, we can improve the processes supporting the delivery of these services through making greater use of digital tools".
It has not ruled out job cuts at the DVLA headquarters in Swansea, as the new digital system goes online, but is awaiting the outcome of a review of staffing levels. The rollout starts in June.
Initially, the new system will check users' identities by asking for their postcode and National Insurance number but, in common with other digital government services, it will eventually allow people to use their bank's system to prove their identity on websites providing government services.
Clicking on an icon will allow people to complete the check required by their bank, mobile phone company, or other service provider. The approach would cut the number of passwords people need to remember, and avoid the need for a central government system to establish identities.
"This is something that is a problem for countries that do not have an ID card system and a national ID database," said Mr Maude.