Ms Smith said she is looking forward to spending more time within her constituency of Lancaster and Fleetwood after making the decision.
The move comes as Labour leader Sir Keir Starmer made changes to the cabinet during a reshuffle today, Monday.
Ms Smith, who was shadow secretary of state for young people and democracy, said in a letter to Sir Keir that she was "grateful" for his offer to keep her in her shadow cabinet position.
However, she said she would leave her role, adding: "I wish to focus more of my time in my Lancashire constituency."
She said: "It has been an honour to serve in the shadow cabinet since June 2016, and on the Labour front bench since September 2015.
"Although I am grateful for your offer to remain in my current brief, I have only been on the backbenches for four months in my six-and-a-half years as an MP and I will instead be returning to the backbenches.
"I wish to focus more of my time in my Lancashire constituency in advance of the next election which I look forward to contesting.
"I have always considered myself a team player, focused solely on the intention of of electing a Labour Government which my constituents, and people right across Britain, desperately need."
Ms Smith said she was disappointed that Jeremy Corbyn had not been readmitted to the Parliamentary Labour Party after being readmitted into party membership.
Offering her opinion as "one of the few remaining northern 'red wall' MPs", she said this position was "utterly unsustainable" and was causing damage within constituency Labour parties and among ordinary members.
She added that she is also disappointed that the party has not adopted a position on proportional representation, something she is a "longstanding advocate of."
"I look forward to spending more time in Lancashire, campaigning for proportional representation and challenging the Government on their woeful inaction on tackling the climate emergency," she said.