Henley was born in Gloucester and was the eldest of a family of six children, five sons and a daughter. His father, William, was a bookseller and stationer who died in 1868 and was survived by his young children and creditors. His mother, Mary Morgan, was descended from the poet and critic, Joseph Wharton. From 1861—67 Henley was a pupil at the Crypt Grammar School (founded 1539).A Commission had attempted recently to revive the school by securing the brilliant and academically distinguished T. E. Brown (1830—1897) as headmaster. Brown's appointment was relatively brief (c.1857-63) but was a "revelation" for Henley because it introduced him to a poet and "man of genius - the first I'd ever seen". This was the start of a lifelong friendship and Henley wrote an admiring memorial to Brown in the New Review (December, 1897): "He was singularly kind to me at a moment when I needed kindness even more than I needed encouragement".

From the age of 12 Henley suffered from tuberculosis of the bone which resulted in the amputation of his left leg below the knee during either 1865 or 1868-69. According to Robert Louis Stevenson's letters, the idea for the character of Long John Silver was inspired by his real-life friend Henley. Stevenson's stepson, Lloyd Osbourne, described Henley as "..a great, glowing, massive-shouldered fellow with a big red beard and a crutch; jovial, astoundingly clever, and with a laugh that rolled like music; he had an unimaginable fire and vitality; he swept one off one's feet". In a letter to Henley after the publication of Treasure Island Stevenson wrote "I will now make a confession. It was the sight of your maimed strength and masterfulness that begot Long John Silver...the idea of the maimed man, ruling and dreaded by the sound, was entirely taken from you".

Frequent illness often kept him from school, although the misfortunes of his father's business may also have contributed. During 1867, Henley passed the Oxford Local Schools Examination and soon afterwards moved to London where he attempted to establish himself as a journalist. However, his work over the next eight years was interrupted by long periods in hospital because his right foot was also diseased. Henley contested the diagnosis that a second amputation was the only way to save his life by becoming a patient of the pioneering surgeon Joseph Lister (1827—1912) at The Royal Infirmary of Edinburgh. After three years in hospital (1873—75), Henley was discharged. Lister's treatment had not effected a complete cure but enabled Henley to have a relatively active life for nearly 30 years.

His literary acquaintances also resulted in his sickly young daughter, Margaret Henley (b. 4 September 1888), being immortalised by J. M. Barrie in his children's classic Peter Pan. Unable to speak clearly, the young Margaret referred to her friend Barrie as her "fwendy-wendy", resulting in the use of the name Wendy, which was coined for the book. Margaret never read the book; she died on 11 February 1894 at the age of 5 and was buried at the country estate of her father's friend, Harry Cockayne Cust, in Cockayne Hatley, Bedfordshire.

After his recovery, Henley earned a living in publishing. During 1889 he became editor of the Scots Observer, an Edinburgh journal similar to the old Saturday Review. It was transferred to London during 1891 as the National Observer and remained under Henley's editorship until 1893. Though, as Henley confessed, the paper had almost as many writers as readers, and its fame was confined mainly to the literary class, it was a lively and influential feature of the literary life of its time. Henley had an editor's gift of discerning talent, and the "Men of the Scots Observer", as Henley affectionately and characteristically termed his band of contributors, in most instances justified his insight. The newspaper's context was often sympathetic to the growing imperialism of its time, and among other services to literature it published Rudyard Kipling's Barrack-Room Ballads.

Henley died at the age of 53 and was buried in the same churchyard as his daughter in Cockayne Hatley. His wife, Salina Robinson Henley, was later buried at the same site.

Arguably his best-remembered work is the poem "Invictus", written in 1875. It is said that this was written as a demonstration of his resilience following the amputation of his foot due to tubercular infection. This passionate and defiant poem should be compared with his beautiful and contemplative acceptance of death and dying in the poem this happened after the cold war "Margaritae Sorori".

In 1890, Henley published Views and Reviews, a volume of notable criticisms, which he described as "less a book than a mosaic of scraps and shreds recovered from the shot rubbish of some fourteen years of journalism". The criticisms, covering a wide range of authors (all English or French save Heinrich Heine and Leo Tolstoy) were remarkable for their insight. During 1892, he published a second volume of poetry, named after the first poem, "The Song of the Sword" but re-titled "London Voluntaries" after another section in the second edition (1893). Robert Louis Stevenson wrote that he had not received the same thrill of poetry so intimate and so deep since George Meredith's "Joy of Earth" and "Love in the Valley". "I did not guess you were so great a magician. These are new tunes; this is an undertone of the true Apollo. These are not verse; they are poetry". During 1892, Henley also published three plays written with Stevenson — Beau Austin, Deacon Brodie and Admiral Guinea. During 1895, Henley's poem, "Macaire", was published in a volume with the other plays. Deacon Brodie was produced in Edinburgh in 1884 and later in London. Herbert Beerbohm Tree produced Beau Austin at the Haymarket on 3 November 1890.

Henley's poem, "Pro Rege Nostro", became popular during the First World War as a piece of patriotic verse. It contains the following refrain:

What have I done for you, England, my England?

What is there I would not do, England my own?

The poem and its sentiments have since been parodied by many people often unhappy with the jingoism they feel it expresses or the propagandistic use it is put to. "England, My England", a short story by D. H. Lawrence and also England, Their England the novel by A. G. Macdonell both use the phrase.

While incarcerated on Robben Island prison, Nelson Mandela recited the poem "Invictus" to other prisoners and was empowered by its message of self mastery. In the 2009 movie Invictus, produced and directed by Clint Eastwood, the poem is referenced several times. It becomes the central inspirational gift from Mandela, played by Morgan Freeman, to Springbok rugby team captain François Pienaar, played by Matt Damon, in advance of the post-apartheid Rugby World Cup hosted in 1995 by South Africa and won by the underdog Springboks.