The government announced the suspension of windfall profits tax on oil and gas companies if prices fall to normal levels for a long time.
A sudden income tax halt would lower the overall tax rate for energy companies from 75% to 40%.
A windfall profits tax is used to target companies that profit from something for which they were not responsible.
It was introduced last year to help fund a scheme to lower energy bills for homes and businesses.
Energy company profits have been rising recently, first because of increased demand after the lifting of Covid restrictions, and later because the Russian invasion of Ukraine drove up energy prices.
But oil and gas prices have now retreated from their all-time highs.
The Treasury Department said in a statement that the windfall tax will remain through March 2028 but that the tax rate will decrease if average oil and gas prices fall to or below the specified level for two consecutive three-month periods.
The level is set at $71.40 a barrel for oil and £0.54 a barrel for gas.
Brent crude was trading at $75 a barrel on Friday morning, with gas prices at around £0.62.
Energy companies are urging ministers to cut windfall profits tax, warning it causes companies to back away from investment.
In April, Harbour, the UK’s largest oil and gas producer, said it would cut 350 UK onshore jobs as a result of the unexpected tax. French oil giant Total Energy also said it would cut its planned investment in the North Sea for 2023 by a quarter – £100m – due to an extension of the windfall profits tax.
The Treasury said its decision reflected those concerns.
She said any drop in investment “puts the long-term future of UK domestic supplies at risk, meaning we will have to import more from abroad at a time when reliable and affordable energy is the focus of households and businesses”.
The UK’s Maritime Trade Authority welcomed the announcement, but warned that the industry still faced challenges.
Chief Executive Officer David Whitehouse said: “This is a step in the right direction, but we will have to do more to restore confidence in our sector.
“We will now work closely with the government and lenders to understand the details of the procedure and its effectiveness in unlocking investment.”
However, the Green Party criticized the possible suspension of the sudden tax.
“The government seems happy to allow these mega-corporations not only to destroy the climate but also to profit from a cost-of-living crisis to which they themselves have contributed,” said Green’s leader, Adrian Ramsey.
“Instead, the government should tighten taxes, close loopholes, and ensure that the money raised helps people through the cost of living crisis and funds sustainable green energy jobs in the renewable energy sector that we urgently need.”
Georgia Whitaker, climate campaigner with Greenpeace UK, said: “No matter what happens to the price of oil and gas, the tax these companies pay should always be higher.
“This money should be used to help insulate homes and transition the UK to clean, cheap energy, not to fill the bank balances of already wealthy shareholders.”
