Every dog owner in England will have to microchip their animal by April 2016 under plans aimed at cutting the growing number of strays.
The government says owners who refuse to comply with changes to the Animal Welfare Act face fines of up to £500.
Rice-sized microchips with a code containing the contact details of owners will be fitted to dogs.
A legal loophole could also be closed, meaning owners could face prosecution if their dog attacked on private land.
Relieve the burdenGovernment figures reveal that more than 100,000 dogs are dumped or lost each year, at a cost of £57m to the taxpayer and welfare charities.
It hopes the change in the law will help "reunite owners with lost or stolen pets", thus relieving some of the burden on animal charities and local authorities.
The change in the law will be effective from 6 April 2016. Any owner whose dog is found without a chip and can be traced by local authorities will have a short period of time to have the dog microchipped.
Fines of up to £500 will be levied by the police against owners who refuse to comply.
Currently some animal charities such as the Dogs Trust, Blue Cross and Battersea Dogs and Cats home offer a free microchipping service to owners.
The procedure - which involves inserting a sterile chip between a dog's shoulder blades - costs about £20-£30 at a private veterinary clinic.
Free microchips, donated by the Dogs Trust, will be circulated to veterinary clinics, although it is currently unclear whether vets will charge for the service.
Compulsory microchipping was introduced in Northern Ireland in April 2012.
Similar plans were considered in Wales in 2012, although no formal policy announcement has yet been made.
The Scottish government has said that, while it recognised the benefits of microchipping, there was "no evidence compulsory microchipping would effectively tackle welfare issues".
Fatal attacksA spokesman added that Holyrood would watch developments in the rest of the UK and "may consider the matter further in future".
Laws governing dog attacks will also be extended to cover private property, closing a loophole which has meant that dog owners whose animals have attacked people on private property are immune from prosecution.
Eight children and six adults have been killed in dog attacks since 2005, with many of these incidents taking place in the home, figures from the Department for Environment and Rural Affairs have shown.
In the past 12 months, more than 3,000 postal workers were attacked by out-of-control dogs, with 70% of these attacks happening on private property.
Householders will however be protected from prosecution if their dog attacks a burglar or trespasser on their land.
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