This aims to develop localised production and strengthen the defence partnership between the two countries, said officials.
The plan was signed at a meeting between Prince Khalid and UK Defence Secretary Ben Wallace on Tuesday.
“It is a pleasure to sign this plan for defence co-operation, bringing us even closer to one of our most important partners,” said Mr Wallace.
“It is a key milestone between our two nations, as we look to enhance our defence partnership further in support of mutual and regional security.”
Saudi ambassador to the UK Prince Khalid bin Bandar also attended the meeting, along with Saudi Chief of the General Staff Lieut Gen Fayyadh bin Hamed, British Air Chief Marshal Sir Michael Wigston, British ambassador to Saudi Arabia Neil Crompton and British military attache to the kingdom, Brig FAJ Piggott.
Prince Khalid later visited the headquarters of BAE Systems in Warton, in Lancashire, northern England.
There he was briefed on BAE's plans, the Eurofighter Typhoon aircraft, and ways to strengthen the defence company's partnership with the Saudi Armed Forces, which goes back 50 years.
The kingdom is seeking to localise military industries, as part of its Vision 2030 policy to diversify the economy away from oil.
Saudi Arabia's Deputy Minister of Industry and Mineral Resources Osama Al Zamil, said 2023 would see “a strong start” to the kingdom's national industry strategy.
Saudi Arabia has spent 5.1 billion riyals ($1.35 billion) to boost its military over the past two years, an industry official said on Monday.
Speaking at a forum in Riyadh, Ahmed Al Ohali, governor of the General Authority for Military Industries, said the sector aims to contribute 95 billion riyals to the country's the GDP by 2030.
It also intends to provide 100,000 job opportunities by 2030 — including “40,000 direct jobs for young men and women”, he said.