Life in the UK test
Update 2017:
There have been further improvements to the test made throughout 2013 until now. Prepare for Life in the UK Test in 2017. You will have access to over 40 tests (all of which are based on the 3rd Edition handbook Life in the United Kingdom: A guide for new residents). Make sure to complete all tests before booking your test.
Everybody who wants to apply for "settlement" and "British citizenship" has to pass the Life in the UK test in order to have his/her application reviewed by the UKBA guidelines. The official test costs £50 pound to sit and can be book from here. Note that you will have to pay the amount for each time you wish to sit the test, so every fail will drain £50 out of your pocket.
The new rules were introduced in October 2013, after the census update, which required to pass the Life in the UK test based on the 3rd edition handbook. The handbook can be purchased from amazon or TSOshop. The new handbook is somewhat more based on actual British life and values rather than statistics, making it much more interesting. You will also need to be good at English to be able to read the book and pass the ESOL test, which is also now required for naturalization.
The test will consist of 24 questions, you will have 45 minutes to complete the test. To practice for the test you will need to read the handbook a few times and do plenty of practice tests. You will need to find a good resource that suits your needs, but I would suggest doing Life in the UK practice tests to prepare for your exam. You can also practice using this free Life in the UK test resource.
You can do the test at over 60 locations across the UK, so you will definitely find a center near you. You need to do this test because the Home Office believes tat any individual who wants to live in the UK must be familiar with it's traditions and values, and the Life in the UK test is the easiest way to see if you are. Many people pass it first time ( it's roughly around 95% for English speaking migrants e.g. Americans, and over 70% for foreign speaking individuals) and do 10 practice tests on average before sitting the official one.
Good luck with your test!
Services we advise you to use:
https://www.gov.uk/life-in-the-uk-test/overview
http://www.lifeintheuktests.com/