Bosses of tech firms could face up to two years in prison if they knowingly fail to protect children from online harm.
The amendment to the Online Safety Bill comes after multiple countries and the European Union ramped up plans to protect social media users.
In future, social media platforms would be forced to remove illegal material from websites to protect children from content such as abuse or self-harm.
The bill was originally planned to be one of the world’s toughest for tech companies, but since November the law has been heavily watered down, sparking a political storm.
Due to fears of damaging free speech, the government removed a section that would restrict “legal but harmful content”.
“This amendment will not affect those who have acted in good faith,” said Michelle Donelan, culture and digital minister, indicating the bill is aimed at those who “consent or connive," in disregarding the new rules.
Prime Minister Rishi Sunak agreed the deal, avoiding his first parliamentary defeat as leader after 50 of his MPs supported the changes to the bill.
This is the third time Sunak has conceded to revolts from within his party, the leader previously backed down on issues involving housing targets and onshore wind farms.