Home Secretary Priti Patel said the move followed a “significant reduction” in the momentum of attacks in Europe – since those seen in Austria and France between September and November 2020.
But she stressed that it was kept under constant review and was always subject to change.
A “substantial” threat level means a terrorist attack is still likely.
The threat level was raised to severe by the Joint Terrorism Analysis Centre (JTAC) in November following the attacks last year, which saw four people shot dead in Vienna, three others die in a knife attack in Nice, and a teacher murdered in Paris.
But on Thursday last week the expert analysts reduced the level, Ms Patel told MPs on Monday.
She added: “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 on the UK is still likely.
“The public should continue to remain vigilant and report any concerns to the police.”