The move, based on an MI5 intelligence assessment, follows a rise in dissident republican activity, including a recent gun attack on a top police officer.
It reverses a downgrade in Northern Ireland's terror threat level last March - its first change for 12 years.
It was announced by Northern Ireland Secretary Chris Heaton-Harris.
MI5, the UK's Security Service, is believed to review the threat level every six months. The terrorism threat level remains substantial in the rest of the UK, meaning an attack is a strong possibility.
Threat levels are designed to give an indication of the likelihood of a terrorist attack and there are five rankings ranging from low to critical. Severe is one level below critical, meaning an attack is expected imminently.
In a written statement to MPs, Mr Heaton-Harris said: "The public should remain vigilant, but not be alarmed, and continue to report any concerns they have to the Police Service of Northern Ireland (PSNI)."
PSNI Chief Constable Simon Byrne said the force would "relentlessly pursue those who seek to cause harm and terrorise our communities, and attack my officers and staff".
The chairman of the Police Federation for Northern Ireland, Liam Kelly, said the escalation of the threat level was justified and that no one should be surprised.
Mr Kelly added that it might be reasonably asked why the level was downgraded to substantial in March.
"It was clear dissident republican groups were still actively wedded to causing murder and destruction," he said.
Deputy Chief Constable Mark Hamilton said dissident republicans were focused on attacking police officers, not the public.
"You should be worried for your police service," he said.
"I wouldn't encourage people to be hugely concerned about their own safety broader than that."
Mr Hamilton said the raised threat level was disappointing but he was confident the threat level could be lowered in time.
In February Det Ch Insp John Caldwell was shot several times by two gunmen as he was putting footballs into his car boot having been coaching a youth training session in Omagh.
On Tuesday, police said the 48-year-old father-of-one had been moved out of intensive care for the first time but remained in a serious condition in hospital.
The attack on him was admitted by the New IRA, the biggest and most active group dissident group, whose main areas of operations are in Londonderry and County Tyrone.
The group was formed in 2012 and previous security assessments estimated it had about 500 supporters, some 100 of whom are prepared to commit acts of terrorism.
On Tuesday, the PSNI's Terrorism Investigation Unit said it had recovered "a quantity of ammunition" during a planned search operation into the New IRA in Ballymagroarty in Derry.
It was put on the back foot by several successful security operations run by MI5, leading to the first reduction in the terrorist threat level in Northern Ireland in a decade.
A number of suspected members of the group were arrested after MI5 bugged two alleged meetings of the New IRA's executive in 2020.
But after a lull in activity the New IRA re-emerged in November with a bomb attack on a police patrol car.
Three months prior to February's attack on the police officer, the New IRA set off a roadside bomb in Strabane, County Tyrone, as a police car drove past, but neither of the two officers inside was injured.
Both attacks showed that after a number of years on the back foot, the organisation remains dangerous.
The republican movement wants Northern Ireland to leave the UK and unite with the Republic of Ireland.
During most of the Troubles the Provisional IRA was the by far the biggest and most influential violent republican paramilitary group.
But in the 1980s and 1990s it and its political wing Sinn Féin began to make moves which eventually led to ceasefires and Sinn Féin's support for the Good Friday Agreement peace deal.
Members who opposed these moves broke away from the Provisional IRA and formed new groups, such as the Continuity IRA, Real IRA and - later - the New IRA.
They remained committed to using violence to try to bring about a united Ireland, something which has been rejected by Sinn Féin for many years.
The support for dissidents is very small: All of Northern Ireland's main political parties are opposed to their actions.
In early March, Arm na Poblachta (Army of the Republic) said police officers' families would be considered targets.
Smaller than the other dissident republican groups, it emerged in 2017 but has not been as active as the New IRA or the Continuity IRA.
MI5, rather than the PSNI or the government, is responsible for setting the Northern Ireland terrorism threat level, which it has been publishing since 2010.
For all but one of those 13 years, the level has been at "severe" - so Tuesday's move should not cause undue alarm.
Most people in Northern Ireland will not notice any difference in terms of everyday security.
Sinn Féin vice president Michelle O'Neill reacted to Tuesday's announcement by saying there was no place or space for paramilitary groups in a modern, democratic society.
"They must go," she said.
Democratic Unionist Party leader Sir Jeffrey Donaldson called on the government to fund more police officers in Northern Ireland.
"With police officers facing such a threat, now is the time for the government to provide that additional funding to ensure the PSNI has the full capacity to meet this threat," he said.
The Alliance Party's Policing Board representative John Blair said the announcement was incredibly concerning but not surprising given recent "unjustifiable events".
Ireland's Minister for Justice Simon Harris said gardaí (Irish police) would also continue to monitor the situation.
"While the threat of an attack from these groups in this jurisdiction is generally considered to be low, An Garda Siochana will continue to work closely with services in Northern Ireland," he said.
Although tensions within loyalist groups have led to attacks in parts of County Down in the past few days, the change to the threat level is not related to this flare up.
Several loyalist paramilitary groups - the largest being the Ulster Volunteer Force and the Ulster Defence Association - are active in Northern Ireland but are not considered a threat to national security and therefore are not a factor in MI5's assessment.