It said this was the first increase for 30 years and in return badge holders would benefit from less abuse of the system under changes to the scheme.
Transport Minister Norman Baker said high levels of fraud meant 50% of badge holders now found it difficult to get a parking space and that fraud was costing around £46 million a year.
Among measures outlined are giving local authorities an on-the-spot power to recover badges that have been cancelled or misused, as well as extending the scheme to more disabled children under three years old, severely disabled military personnel and veterans.
A decision has been deferred until later in the year on whether or not to extend eligibility for a badge to people with temporary disabilities lasting at least a year, pending the outcome of independent research into the likely impacts on existing holders and local authorities.
Mr Baker said: “The Blue Badge Scheme makes a real difference to millions of disabled people every day. However, it is clear that it is in real need of modernisation after 40 years without major reform.
“The changes I am announcing today will crack down on badge misuse, modernise the system and extend eligibility.
These improvements will mean that badge holders get a much better service for less than 1p per day.”
Dai Powell, chairman of the Disabled Persons Transport Advisory Committee, said: “These proposals can bring us one step nearer to a fairer and more consistently applied scheme.”