Dillane was born in Kensington, London, to an English mother, Bridget (née Curwen), and an Australian surgeon father, John Dillane. His younger brother, Richard Dillane, is also an actor. He read history and political science at the University of Exeter and afterward became a journalist for the Croydon Advertiser. Unhappy in his career, he read how actor Trevor Eve gave up architecture for acting and was thus inspired to enter the Bristol Old Vic Theatre School. During his early acting career he was known as Stephen Dillon but reverted to his birth name of Stephen Dillane in the 1990s.
The same year, Stephen Dillane also starred in British independent feature film Papadopoulos & Sons in which he plays a successful entrepreneur, Harry Papadopoulos, who rediscovers his life after being forced to start again from nothing following a banking crisis. His real-life son Frank Dillane plays his son in the movie.
On 23 January 2013, it was reported that Dillane had been cast as the male lead in the Sky Atlantic/Canal+ series The Tunnel.