Total Royal Household spending will fall 14 percent in 2012-2013, grants to the household will be frozen in cash terms.
“The Household obviously has some challenging times ahead, like many areas of government,” a palace spokesman said.
But he said the queen welcomed the new funding mechanism, known as the Sovereign Support Grant, “as a modern, transparent and simpler way of funding the Head of State.”
The monarch, under pressure to reduce costs had already agreed to the 7.9 million pound ($12.42 million) cost of the Civil List being frozen for 20 years from 1990. That arrangement expired this year.
In October, Buckingham Palace announced it had scrapped its planned Christmas party after it was deemed inappropriate to celebrate as millions of ordinary Britons feel the pinch from tough economic times.