The monarch was due to dine with the Duke and Duchess of Cornwall, plus approximately 50 members of the royal family at Windsor Castle. The occasion also marks her first Christmas without her husband Prince Philip.
The outlet reports the palace feels it is "the right thing to do" in response to the new variant.
The Queen ultimately made the decision as the family event would "put too many people's Christmas arrangements at risk if it went ahead."
Buckingham Palace did not elaborate further because they said it is a "private family event".
According to The Sun, a small group of family members are expected to still join the Queen at Sandringham but the ongoing rise in Covid-19 cases also puts this in doubt.
What's more, the Queen has had health concerns of her own in the second half of 2021.
Concerns over her health have grown after she cancelled several recent engagements, including the Remembrance Sunday service for the first time in over 20 years due to a back sprain, the Daily Mail reported earlier this month.
Buckingham Palace said in a statement that she'd made the decision not to attend with "great regret" and disappointment.
She earlier spent a night in hospital with an unconfirmed illness before being told by her doctors to rest at home.
In 2020, the Queen and Prince Philip had a quiet Christmas together due to pandemic restrictions.
