The government is scaling back the windfall tax on bumper oil and gas profits in response to fossil fuel companies warning they are cutting back on investment.

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

The windfall tax – 75% of North Seal oil and gas production profits – will continue to March 2028 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.

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 limited typical domestic energy bills.

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.