Combined takings from streaming, downloads, physical sales and licensing for use in films, TV and computer games rose 5.1% to £926m.
The main contributor to growth was streaming, but vinyl revenues rose by more than two thirds.
However, more revenues could be generated by platforms such as Youtube, the BPI said.
Revenue from physical formats dipped below £300m last year, but remained just above the £274m generated by streaming services such as Spotify, Apple Music and Deezer.
Geoff Taylor, chief executive of the BPI and the Brit Awards, said the increase in revenues was encouraging, as more and more consumers enjoyed the benefits of subscribing to a streaming service or rediscovered the joys of vinyl.
"Britain's world-leading music sector has the potential for sustained growth in the years ahead, but this exciting future can only be realised if government makes creative businesses a priority post-Brexit," he added.
UK artists needed to be able to tour freely in EU markets, and UK businesses needed to be able to employ the best talent, Mr Taylor argued.
He added that strong intellectual property protections would need to be included in trade talks with third party countries.
An International Trade spokeswoman said: "Music is one of our most important exports and trade policy has a key role in supporting growth in this market.
"We will in due course explore all options in the design of future trade agreements, including the role of intellectual property rights in boosting UK exports in overseas markets."
Streaming revenues jumped more than 60% in 2016, and accounted for close to a third of label revenues.
The BPI said streaming would overtake revenues from physical sales in 2017.
However, the association added that there was a "growing mismatch between the huge value that certain digital platforms, such as YouTube, extract from music or other entertainment and the relatively small amount they return back to the creators concerned".
A YouTube spokesperson said it was working "with the music industry to bring more money to artists, labels and publishers".
She said that YouTube had paid out more than $1bn to the music industry globally from advertising in the past year.
"YouTube is contributing a meaningful and growing revenue stream for the industry."
However, many argue that the Google-owned video site should pay out far more revenue to artists and songwriters.

Vicky Cherry, 44, had been missing for 15 months when police found her body wrapped in a duvet and plastic sheeting at a house in Toronto Street, Bolton, in January.
Andrew Reade, 43, admitted preventing the lawful burial of a body and perverting the course of justice.
He was sentenced at Bolton Crown Court to four years and four months in jail.
Miss Cherry's cause of death could not be ascertained because of heavy decomposition but a pathologist concluded she may have died as a result of strangulation, as injuries to her neck were detected.
Sentencing Reade, Judge Timothy Clayson said the defendant could not be held responsible for Miss Cherry's death but what followed was "inexcusable".
Officers had launched a "non-body" murder investigation because Miss Cherry, from Fulwood, Lancashire had not been seen since October 2015.
Reade, of Toronto Street, Bolton, told her family they had split up and she had moved to Blackburn. However, police discovered that her unemployment benefits were still being withdrawn in Bolton.
When officers arrested Reade on suspicion of murder, he claimed he had panicked upon waking to find his girlfriend dead after they had binged on a cocktail of drugs.
The 43-year-old admitted hiding her body and lying to her family and police. He also admitted taking her benefits for several months after her death.
In a victim statement to the court, Miss Cherry's daughter said: "Reade has held her body in a cupboard with things on top of her like she was a piece of rubbish.
"I will never forgive Reade. Reade himself is the only person who truly knows what happened to my mother. We will be forever tormented by this."
Nick Ross, defending, said his client, a long-standing user of Class A drugs, had exercised "very poor judgment" after grief and panic had set in following Miss Cherry's death.
"He wishes he could turn the clock back," he said.
Det Ch Insp Terry Crompton said: "Reade's deliberately deceptive and misleading actions seriously obstructed the investigation into how Vicky died and cost us valuable opportunities to investigate."
Revenue for UK record companies hit a five-year high in 2016, according to industry association the BPI.
[NEXT_CONCEPT]
A man who hid his dead girlfriend's body in an airing cupboard for more than a year has been jailed.