Shaffer was born to a Jewish family in Liverpool, the son of Reka (née Fredman) and Jack Shaffer, who was an estate agent. He is the twin brother of another playwright, Anthony Shaffer.

He was educated at St Paul's School and subsequently he gained a scholarship to Trinity College, Cambridge to study history. Shaffer was a Bevin Boy coal miner during WW2 and took a number of jobs including bookstore clerk, and assistant at the New York Public Library, before discovering his dramatic talents.

Shaffer's first play, The Salt Land (1954), was presented on the BBC. Encouraged by this success, Shaffer continued to write and established his reputation as a playwright in 1958 with the production of Five Finger Exercise which opened in London under the direction of John Gielgud and won the Evening Standard Drama Award. When Five Finger Exercise moved to New York in 1959, it was equally well-received and landed Shaffer the New York Drama Critics Circle Award for Best Foreign Play.

Shaffer's canon contains a unique mix of philosophical dramas and satirical comedies. The Royal Hunt of the Sun (1964) presents the tragic conquest of Peru by the Spanish, while Black Comedy (1965) takes a humorous look at the antics of a group of characters feeling their way around a pitch black room ... although the stage is actually flooded with light.

Equus (1973) won Shaffer the 1975 Tony Award for Best Play as well as the New York Drama Critics Circle Award. A journey into the mind of a 17-year-old stableboy who had plunged a spike into the eyes of six horses, Equus ran for over 1000 performances on Broadway and has been revived by Massachusetts' Berkshire Theatre Festival in the summer of 2005, staged by Scott Schwartz (son of composer Steven Schwartz), with Victor Slezak as Dr Martin Dysart and Randy Harrison as Alan Strang. (Roberta Maxwell, who originated the role of Jill, Alan's would-be girlfriend, in the original Broadway production in the 1970s, played a judge in this revival.) and in 2007, with Richard Griffiths and Daniel Radcliffe in the leading roles. The play was directed by Thea Sharrock, and opened in London in February 2007 at the Gielgud Theater. The casting of Radcliffe, still associated with films intended for general audiences, caused some controversy, since the role of Alan Strang required him to appear naked on stage.

Shaffer followed this success with Amadeus (1979) which won the Evening Standard Drama Award and the Theatre Critics Award for the London production. Amadeus tells the story of Wolfgang Amadeus Mozart and court composer Antonio Salieri who, overcome with jealousy at hearing the "voice of God" coming from an "obscene child," sets out to destroy his rival. When the show moved to Broadway, it won the 1981 Tony Award for Best Play and, like Equus, ran for more than 1000 performances.

Several of Shaffer's plays have been adapted to film, including Five Finger Exercise (1962), The Royal Hunt of the Sun (1969), Equus (1977), and Amadeus (1984), which won eight Academy Awards including Best Picture.

Shaffer received two Academy Award—nominations for adapting his plays "Equus" and "Amadeus" for the big screen. For writing the screenplay for "Equus", he was nominated for the 1977 Best Adapted Screenplay Oscar but the award went to Alvin Sargent, who wrote the screenplay for Julia. For writing the screenplay for Amadeus, Shaffer received both the 1984 Best Screenplay Golden Globe and the 1984 Best Adapted Screenplay Oscar.

He received the William Inge Award for Distinguished Achievement in the American Theater in 1992. Two years later he was appointed Cameron Mackintosh Visiting Professor of Contemporary Theatre at Oxford University. He was named Knight Bachelor by Queen Elizabeth II in the 2001 New Years Honours.