The youngest of four children, Pearce was brought up in the Mill House in the village of Great Shelford, Cambridgeshire. Starting school late at the age of eight because of illness, she was educated at the Perse School for Girls in Cambridge, and went on to Girton College, Cambridge, after winning a scholarship to read English and History there.

After gaining her degree, she left university and moved to London where she found work as a civil servant. She wrote and produced schools radio programmes for the BBC, where she remained for thirteen years. From 1958 to 1960 she was children’s editor at the Oxford University Press, and from 1960 to 1967 at the André Deutsch publishing house.

In 1951 Pearce spent a long while in hospital, recovering from tuberculosis; during this stay she passed the time thinking about a canoe trip she had taken many years before. This was the inspiration for her first book, Minnow on the Say, published in 1955. Like several of her subsequent books, it was inspired clearly by the area where she had been raised, with the villages of Great and Little Shelford becoming Great and Little Barley, Cambridge becoming "Castleford" (nothing to do with the real town of the same name in West Yorkshire) and losing its university, and the River Cam becoming the River Say.

Her next and best known book, Tom's Midnight Garden (1958), has become one of the classic "time stories", inspiring a film, a stage play, and three TV versions. It was awarded the Carnegie Medal in Literature in 1959. The "midnight garden" was, in fact, based directly on the garden of the Mill House where she had grown up. She wrote over 30 books, including A Dog So Small (1962),The Squirrel Wife (1971), The Battle of Bubble and Squeak (1978) and The Way To Sattin Shore (1983). The Battle of Bubble and Squeak inspired a two part television adaptation in Channel 4's Talk, Write and Read series of educational programming.

Although not a prolific author of full-length books, Philippa Pearce continued to work over the following years, speaking at conferences, editing anthologies and writing short stories, as well as attending a reception for children's authors at Number 10 Downing Street – the home of the Prime Minister – in 2002.

In 2004 she published her first new full-length book for two decades, The Little Gentleman. A further children's novel, A Finder’s Magic, was published posthumously in 2008.

In 1962 Pearce married Martin Christie, who, never having fully recovered from being a Japanese prisoner of war, died two years later. They had one child, Sally, who was to become a children's author herself (under the name Sally Pearce). From 1973 until she died from complications of a stroke in 2006, Philippa Pearce lived once again in Great Shelford, down the same lane where she was brought up.