She will abdicate the throne on 14 January, which will be 52 years to the day since she became queen.
Her eldest son Crown Prince Frederik will take the role of king following Margrethe's departure.
The 83-year-old is the longest serving monarch in Danish history, taking the throne after the death of her father King Frederik IX in 1952.
Unlike British royal tradition, there will be no formal crowning ceremony for Crown Prince Frederik, who is 55. Instead, the palace will announce his ascension on the day.
Queen Margrethe is a popular figure in Denmark, and many Danes had expected her to remain on the throne until her death.
Each year on New Year's Eve, she delivers a speech broadcast on television.
This year, aside from the announcement, she also spoke of the wars in the Middle East and Ukraine, as well as the importance of addressing climate change.
Facing similar challenges of modern society as other royal families across Europe, the Danish royal family has decided to slim down its number of royals.
This led to a very public rift last year after Crown Prince Frederik's younger brother Prince Joakim's children were stripped of their royal titles.
