The Post Office will be thrown a lifeline on Tuesday when the government awards it a £450m contract to continue to provide driving licenses and tax discs for up to a decade.

The Driver and Vehicle Licensing Agency had been considering three bids for the seven-year deal, which will start next April. The final shortlist came down to a decision between bill payment service PayPoint and the Post Office.

The postal unions had warned that losing the service would have damaged hundreds of post offices, some of which rely on up to 20 per cent of their revenues on the DVLA contract.

The National Federation of SubPostmasters had warned that it would be “catastrophic” for Britain’s postal network which would be left “in tatters” if it did not get the deal.

The DVLA will say that the seven-year deal could be extended for another three years. The contract will include normal licenses and tax discs to be offered at nearly 5,000 outlets, as well as some services currently provided by the DVLA itself, such as licensing of heavy goods vehicles.

It will also have the scope to provide front office services for some other government departments, which will also be welcomed as good news for the Post Office.

A government source said the deal was “good news for the taxpayer” and for local post offices.

The government had angered subpostmasters and unions last year by awarding the contract for a new service to replace welfare cheques to Citibank rather than to the Post Office.

The DVLA bids were scrutinised by an independent “review panel” separate from the government, which began the bidding process in December last year.

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