The Department for Transport (DfT) is also starting a new trial in partnership with Thurrock and York councils in an effort to identify potholes quicker and combat them faster.
A "pothole-spotter system" will be mounted to refuse vehicles, featuring HD cameras and software to identify road surface problems before they develop into potholes.
It comes as the Local Government Association (LGA), which represents more than 370 councils in England and Wales, has warned this year could be the "tipping point" for potholes, and the repair bill could hit £14bn within two years.
The total spending has risen from £9.8bn in 2012, to £11.8bn last year, according to Asphalt Industry Alliance.
Transport minister Andrew Jones said the announced funding includes money from the new National Productivity Investment Fund, announced in the Autumn Statement and the Pothole Action Fund.
It also includes £75m which councils can bid for to repair and maintain local infrastructure such as bridges, street lighting and rural roads.
"Roads play a significant part in everyday life linking people with jobs and businesses with customers, which is why this government is investing record amounts improving and maintaining highways across the country to help motorists," Jones said.
"The funding we have allocated today is focused on relieving congestion and providing important upgrades to ensure our roads are fit for the future - helping to build an economy that works for everyone."
The £1.2bn funding for 2017/18 inclues...
- £210m from the National Productivity Investment Fund. From this, £185m will be allocated in 2017/18 to local highway authorities in England, outside London, to improve local highways and public transport networks
- £801m to be shared across local highway authorities in England, outside London, to help improve the condition of local roads;
- £70m to be shared across local highway authorities in England, outside London, from the Pothole Action Fund which will help repair over 1.3m potholes;
- £75m from the Highways Maintenance Challenge Fund, inviting local highway authorities in England, outside London, to compete for funding to help repair and maintain local highway infrastructure, such as bridges, lighting and rural roads.
- £75m from the Highways Maintenance Incentive Element