The former midfielder was handed an 18-month deal when he took over from Andre Villas-Boas in December, but Spurs have exercised a break clause in that contract.
Sherwood was not afraid to criticise his players in public and he has faced questions about his future ever since it emerged that Spurs chairman Daniel Levy had met with Netherlands boss Louis van Gaal in January.
Levy said in a statement: “We appointed Tim mid-season as someone who knew both the players and the Club.
“We agreed an 18-month contract with a break clause at the end of the season and we have now exercised that option.
“Moving forward, now the season is over, we shall embark on the process of finding a new Head Coach. We have a talented squad and exciting young players coming through. We need to build on this season, develop our potential and inspire the kind of performances that we associate with our great Club."
Sherwood's final few weeks in charge at White Hart Lane were undermined by rumours surrounding who would replace him in the manager's seat.
A meeting between Levy and Van Gaal early in his reign created speculation that Sherwood would not survive the summer, while Ajax boss Frank de Boer has recently spoken openly about the possibility of taking the job.
Goal understands that Southampton boss Mauricio Pochettino is also in the running to take over, while reports elsewhere indicate an approach for Napoli boss Rafael Benitez could be on the cards.
Sherwood often criticised his players, most notably following a 4-0 defeat at Chelsea when he blamed the "capitulation" on a "lack of character" among the squad.
His touchline antics were also called into question during his short spell in charge. During derby defeat against Arsenal he hurled his famed gilet to the ground, and was later involved in a spat with Benfica boss Jorge Jesus during a Europa League clash.
He elected to sit in the stands for several matches following the incident, but later return to the technical area. On the final match of the season against Aston Villa on Sunday, he invited a supporter to sit in his seat and wear his gilet, but said he had no chance of succeeding him because the fan was English.