The government has U-turned on its opposition to a windfall tax on oil and gas firms, announcing it will introduce a levy to help tackle rising bills.
Ministers had rejected the idea - put forward by opposition parties - that would see a one-off charge imposed on the company's record profits.
But Chancellor Rishi Sunak said his levy would "tax extraordinary profits fairly and incentivise investments".
Labour's Rachel Reeves said Mr Sunak had "finally come to his senses".
The chancellor said new tax would raise £5bn over the course of the next year, allowing the government to "help families with the cost of living", while avoiding "having to increase our debt burden further".
He added: "There is nothing noble in burdening future generations with ever more debt today because politicians of the day were too weak to make the tough decisions."
The new tax will help fund a £15bn package from the government, which includes a £650 one-off payment for eight million low income households, and a change to the £200 loan scheme for energy bills for all homes in the autumn - increasing it to £400 without the need to pay it back.
But Liberal Democrat Treasury spokeswoman Christine Jardine said the measures were "too little, too late".
The plans received a mixed reaction from the Conservative backbenchers, with some calling it "tripe" and others saying it did not go far enough.
The government faced accusations that it had timed the announcement to distract from the release of the Sue Gray report into lockdown-breaking parties in Downing Street during the pandemic.
But the claims were denied by No 10.
Households across the country have faced soaring costs in recent months as the prices of food, fuel and energy have all rocketed, with inflation hitting a 40-year high.
The government has been under growing pressure to act, especially after energy regulator Ofgem warned of an additional rise to bills of £800 in the autumn.
The Liberal Democrats first put forward the idea of a windfall tax on the profits of oil and gas companies - which have peaked as the economy restarted after the pandemic - in November, with Labour outlining its own version in January.
The SNP has also called for such a measure.
The parties said the money raised could go towards helping those households hardest hit by the cost of living increases.
Initially, the idea was rejected by ministers, including Boris Johnson, who warned it could "deter" investment.
But both Mr Johnson and Mr Sunak subsequently softened their stance, and now the policy U-turn has been confirmed.
'Kicking and screaming'
Making a statement in the Commons, the chancellor said the inflation faced by the UK was causing "acute distress for the people of this country" and he knew people were worried.
But, Mr Sunak added: "This government will never stop trying to help people, to fix problems where we can, to do what is right - as we did during the pandemic."
He confirmed the government would introduce a "temporary targeted energy profits levy" charged at a rate of 25% on profits of oil and gas companies to fund "significant support for the British people".
However, he said his "sensible middle ground" plan included a new investment allowance, so "for every pound a company invests they will get back 90% in tax relief - the more the company invests the less tax they will pay".
Mr Sunak said: "We should not be ideological about this, we should be pragmatic.
"It is possible to both tax extraordinary profits fairly and incentivise investments."
The chancellor said the tax would then be removed when energy prices returned to normal levels.
Shadow chancellor Ms Reeves said the government had been "dragged kicking and screaming" to its new policy position.
She added: "The chancellor has finally come to his senses, U-turned, and adopted Labour's plan for a windfall tax on oil and gas producer profits to lower bills."
But Ms Reeves claimed the government "still have no long term plan to grow our economy and pull us out of the mess they've got us into".
What does this change of tack signal?
Analysis by David Wallace Lockhart, BBC political correspondent
Ministers have been facing calls to do more to help with the cost of living for quite some time. So why today?
As recently as the weekend, Downing Street sources were indicating there would be no imminent announcement on windfall taxes.
And it was only a couple of weekends ago Business Secretary Kwasi Kwarteng called it a "bad idea".
So why the change of heart?
Well, ministers have been clear for some time that more help is on the way. And they did get a clearer idea of future energy prices this week.
But - to be more cynical - the government had a particularly uncomfortable day on Wednesday with the publication of the Sue Gray report into Downing Street gatherings.
Boris Johnson has made it clear that he's desperate to stop talking about parties. An announcement of billions of pounds of assistance for households certainly helps to move the agenda on.
Downing Street deny that the timing of this has anything to do with Partygate. But plenty of opposition MPs won't buy that argument.
The package of measures announced by Mr Sunak was attacked by many of his opponents for not going far enough.
Lib Dem leader Sir Ed Davey criticised the government for failing to cut taxes for workers, pointing to the new health and social care levy introduced in April amid the cost of living crisis.
He tweeted: "Sunak's like a thief who steals your car and then wants you to be grateful when he returns the steering wheel."
The SNP's Kirsty Blackman said the government had "listened to a certain extent", but had "failed" on a number of measures, especially her party's call to uprate benefits in line with inflation.
She told the BBC the one-off payment was "kicking the can down the road" and those hit hardest could face more difficulties in the future.
When it came to Mr Sunak's own benches, Conservatives appeared split on both the policies and how to fund them.
Richard Drax accused the chancellor of "throwing red meat to the socialists by raising taxes on businesses", adding a windfall tax was "not the Conservative way" of doing things.
Another backbench Tory, Craig Mackinlay, said he was "appalled that a Conservative chancellor could come up with this tripe", calling the tax "outrageous" and "inherently wrong".
Former party leader Sir Iain Duncan Smith, however, called the chancellor's statement "a good start and welcome", but added: "More needs to be done.
"Our response to this economic crisis should have three goals at its centre: adequate financial support for the poorest, helping those who are able into work, and reducing the burden of taxation."