Every package holidaymaker will pay a £1 levy to protect their trips from April next year.
The levy will help out travellers if their airline or tour operator goes bust before they travel or while they are away.
The government has confirmed that the compulsory fee will replace the current Atol bonding system.
The new scheme will cover traditional package holidays and should also protect dynamically packaged holidays where consumers buy a flight and hotel or car hire separately with the same tour operator.
The current Atol fund needed urgent reform as it is currently £20 million in the red, leaving it short on money to repatriate travellers or pay refunds when a travel firm collapses.
It’s hoped the new scheme, which will be run by the Civil Aviation Authority, will plug this funding gap.
Which? travel spokesman, Bob Tolliday, said: ‘The levy will make it easier for consumers to identify if they have booked a package holiday and therefore know if they have protection if things go wrong.
‘However it still leaves passengers who booked a scheduled or no-frills flight unprotected if their airline goes bust.’