It is the first time the threat of an attack has been set at Substantial since August 2014.
The decision was announced in a written ministerial statement to parliament on Monday.
In it, the home secretary said: "Despite the change in the threat level, terrorism remains one of the most direct and immediate risks to our national security.
"Substantial continues to indicate a high level of threat; and an attack might well occur without further warning.
"As ever, the public should remain vigilant and report any concerns they may have to the police," she continued.
"Government, police and intelligence agencies will continue to work tirelessly to address the threat posed by terrorism in all its forms.
"The threat level is kept under constant review."
The level is set by the Joint Terrorism Analysis Centre and the Security Service (MI5).
The government said threat levels do not have an expiry date. They can change at any time as different information becomes available to security services.
The level was raised to "critical" in May 2017 after the Manchester Arena bombing and later downgraded to "severe", where it has remained since September 2017.