The government will end the windfall tax on bumper oil and gas profits in 2028, if prices drop.
The move is in response to fossil fuel companies warning they are cutting back on investment.
The windfall tax – 75% of North Sea oil and gas production profits – will continue for the next five years but the government has announced that if prices fall to historically normal levels for “a sustained period” the tax rate for oil and gas companies will return to 40%.
Companies do not pay the full 75% or 40% rate as they can offset tax liabilities on investment they make.
Though the windfall tax included an investment allowance the government said if it didn’t end when prices come down the long-term future of the UK’s domestic oil and gas supply is at risk, as the country would import more from abroad.
The windfall tax, known as the energy profits levy, has raised around £2.8bn to date, the government added, and is expected to raise almost £26bn by March 2028.
Funds raised have been used to support household energy schemes such as the energy price guarantee, which limits typical domestic energy bills until the end of June.
No new oil and gas projects can be developed if the world is to stay within safe levels of climate change, the International Energy Agency said more than two years ago.
But the Treasury said it would be “irresponsible to turn off the North Sea taps overnight”.
“Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk,” Gareth Davies, exchequer secretary to the Treasury, said.
Supporting new oil and gas projects in the North Sea has been politically contentious in recent weeks. Labour has come under pressure from the GMB union and the prime minister over its policy to ban new fossil fuel projects in the waters off the UK.
Labour leader Keir Starmer said he would work with unions to “seize the opportunities” of green energy to prevent mass job losses and avoid mistakes of the 1980s which decimated coal communities.
Today’s announcement has been welcomed Offshore Energies UK, formerly Oil and Gas UK, but the group said more needed to be done and details of the government plan need to be understood.
“Enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment,” a spokesperson said.
“We provide over 200,000 good, skilled jobs across the length and breadth of the UK.”