The legislation delivers 'the most comprehensive legal framework of its kind worldwide' for the safe deployment of self-driving vehicles in Britain, according to the Department for Transport (DfT).
Transport Secretary Mark Harper said the technology will be 'a real boost to both safety and our economy'.
However, experts say secondary legislation is still required in order to iron out liability issues if crashes occur and cybersecurity risk.
Announced in last year's King's Speech, the Automated Vehicle Bill passed through parliament last week and has now been enacted into law.
The DfT says it will help to 'unlock the potential of an industry estimated to be worth up to £42billion' and create 38,000 jobs by 2035.
Currently, there are strict restrictions on 'assisted driving' features motorists can use in the UK - the most advanced of which is Ford's BlueCruise system, the first hands-free tech approved by the DfT but one that uses cameras to ensure drivers are paying attention at all times.
But the AV Act is set to provide a roadmap for vehicles with full self-driving features to legally be used in Britain, potentially within two years.
Minsters are eager to accelerate the automated-vehicle transition, with the tech predicted to dramatically improve road safety.
In recent years, road casualty numbers have remained relatively flat despite the introduction of a wave of stricter rules and new driving laws, such as tougher punishments for those caught using a mobile phone behind the wheel and a raft of updates to the Highway Code.
With human error contributing to 88 per cent of collisions in 2022 - including accidents attributed to drink driving, speeding, tiredness and inattention -, AVs should eliminate some deadly crashes.
What's in the Automated Vehicle Act?
The act now sets out the minimum safety threshold self-driving vehicles must achieve.
This is currently stated as a level 'at least as high as careful and competent human drivers'.
It also outlines that AVs will need to pass rigorous safety checks before being allowed on our roads.
The act will eventually define who is liable if something goes wrong - especially if there are collisions involving AVs when the technology is activated - and establish an in-use regulatory scheme to monitor the ongoing safety of cars fitted with self-driving features.
This will include a vehicle approval system supported by an independent incident investigation function, which mirrors that used in the aviation industry.
As such, companies will have ongoing obligations to keep their vehicles safe and ensure that they continue to drive in accordance with British laws.
It means motorists will not be held responsible for the action of a vehicle in self-driving mode, with businesses such as insurers, manufacturers and software developers likely liable when something goes wrong.
However, in vehicles or contexts where drivers assume a certain level of control, the responsibility will remain on the person.
This means motorists will still need to be qualified and ready to take back control of an autonomous car at any time.
It means they cannot be over the drink drive limit, use their mobile phone or have a nap behind the wheel of a self-driving car under what will be strict instructions drawn up by the Law Commission.
The commission outlines that motorists must 'remain in a fit state to drive' while their car is on the road, and there must be a 'user in charge' who is able to take control if the self-driving system requests for them to do so.
Drivers will still need to be sat in the front seat and have a driving licence to operate their vehicles, and failing to do so could open them up to prosecution.
'Britain stands at the threshold of an automotive revolution, and this new law is a milestone moment for our self-driving industry which has the potential to change the way we travel forever,' Mr Harper said on Monday.
'While this doesn't take away people's ability to choose to drive themselves, our landmark legislation means self-driving vehicles can be rolled out on British roads as soon as 2026, in a real boost to both safety and our economy.'
Between 2018 and 2022, the DfT claims that the UK self-driving vehicle sector generated £475million of direct investment and created 1,500 new jobs.
And ministers believe they can provide a solution to recent HGV driver shortages and bolster safety in sectors where work can be dangerous, such as mining.
Trials in Britain have already presented how self-driving vehicles could improve the lives of millions with mobility issues and provide transport for the nation's most isolated people, including those living in remote areas.
Mike Hawes, chief executive at the Society of Motor Manufacturers and Trader (SMMT), said the AV Act signals a 'watershed moment for UK automotive innovation and road safety in the UK'.
He added: 'Self-driving vehicles will revolutionise our society, and this new law will help turn ambition into reality, putting the UK alongside a handful of other global markets that already have their regulatory frameworks in place.'
Tom Leggett, vehicle technology manager at the UK's only not-for-profit automotive risk intelligence organisation, Thatcham Research, said the AV Act will put the UK in a 'better position to safely adopt automated vehicles on our roads'.
'Reassuringly, the act recognises several points raised in our joint Insurer Requirements for Automated Vehicles report,' he said.
'This highlights an understanding from lawmakers that working alongside insurers and other key automotive stakeholders is essential to ensuring the safe adoption of this technology.'
However, Thatcham says there is still work to be done through secondary legislation to ensure this technology is adopted sustainably.
'Challenges remain around the clarity of insurance responsibility in the event of an AV collision, the clear identification of self-driving capabilities, and the possible cybersecurity risk,' Leggett says.
'Automated Vehicles represent an exciting future for the UK automotive sector, but only if we can ensure there is suitable legislation and guidelines to protect drivers and insurers.'
Jonathan Fong from the Association of British Insurers says the UK has 'firmly put itself on the path to being world leaders on automated vehicle technology' but says as the technology continues to evolve, so must the legislation.
'We look forward to further collaboration between insurers, government and the wider motor industry to address any potential roadblocks around data sharing, road safety and cyber security,' he added.