"I'm pleased it's sorted and delighted to be staying with the team," the 32-year-old said. "It's been a great journey for me with Team Sky and obviously the last few months have been crazy."
Thomas's contract was due to expire at the end of the year and last month he said he was open to listening to other offers.
Former track Olympic gold medallist Thomas joined Team Sky in 2010 but initially lived in the shadow of Bradley Wiggins and four-times Tour champion Chris Froome.
He eclipsed Froome at the Tour this year, however, and now looks set to challenge him for superiority in the British team.
"It really is one big happy family where my relationship with Team Sky is concerned, so I couldn't be more delighted," Thomas said.