McPhillips took over as permanent manager in September 2018 having had a successful spell as caretaker following Gary Bowyer’s resignation at Bloomfield Road as the chaos under former owner Owen Oyston continued.
Oyston’s departure from the club last season resulted in the return of supporters who boycotted the club in protest at his ownership, with new owner Simon Sadler taking over the club last month.
McPhillips guided Blackpool to 10th in League One against the backdrop of the ongoing trouble at the club, as well as the last-16 of the EFL Cup – where they narrowly lost to Arsenal at the Emirates.
The 50-year-old believes this is right time for him to step aside.
He said in a statement: “I never really had any intention of becoming a manager, yet I stepped up in difficult circumstances last season because the club needed some stability.
“While discussing the option of a new contract, I’ve had plenty of time to reflect on things and feel that the time is now right for me to step aside.
“That stability has now been achieved and an exciting future awaits under Simon’s ownership.
“It’s been an honour to manage Blackpool in the short-term, and I will forever cherish the fact that I was in charge of the team when all the fans returned for the homecoming match against Southend United.”
Sadler expressed his thanks to McPhillips, saying: “Terry has been very gracious in his discussions with the board and we wish him well in his future endeavours.
“He did a very good job in guiding the club to a top-half finish last season after quickly going from assistant to manager. We’re all appreciative of his efforts.”