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 Seal 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%.

Prices had reached historic highs following the invasion of Ukraine, resulting in record profits for oil and gas producers such as Shell and BP.

Companies do not pay the full 75% or 40% rate as they can offset tax liabilities on investment they make.

The windfall tax, known as the energy profits levy, has raised around £2.8bn to date, the government said, and is expected to raise almost £26bn by March 2028.

Funds raised have gone to support household energy schemes such as the energy price guarantee, which limits typical domestic energy bills until the end of June.

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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.

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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.

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