Benson was born on 24 April 1862 at Wellington College, Berkshire, the son of Edward White Benson (1829–1896), first headmaster of the college. He was one of six children of Edward White Benson (Archbishop of Canterbury, 1882–96) and his wife Mary Sidgwick Benson, sister of the Philosopher Henry Sidgwick.

During 1874 he won a scholarship to Eton from Temple Grove School, a preparatory school in East Sheen. He became a student of King's College, Cambridge during 1881, where he was a scholar and scored first for the Classical tripos during 1884.

From 1885 to 1903 he taught at Eton, returning to Cambridge in 1904 as a Fellow of Magdalene College to lecture in English Literature. He became President of the college in 1912 and Master of Magdalene in December 1915, a post he held until his death in 1925. From 1906, he was a governor of Gresham's School.

Like his brothers Edward Frederic (E. F.) and Robert Hugh (R. H.), A. C. Benson was noted as an author of ghost stories. The bulk of his published ghost stories in the two volumes The Hill of Trouble and Other Stories (1903) and The Isles of Sunset (1904) were written as moral allegories for his pupils. After Arthur's death, Fred Benson found a collection of unpublished ghost stories. He included two of them in a book, Basil Netherby (1927); the title story was renamed "House at Treheale" and the volume was completed by the long "The Uttermost Farthing"; the fate of the rest of the stories is unknown. The collection Paul the Minstrel and Other Stories (1911; reprint 1977, collects the contents of The Hill of Trouble and Other Stories and The Isles of Sunset. Nine of Arthur's ghost stories are included in David Stuart Davies (ed), The Temple of Death: The Ghost Stories of A. C. & R. H. Benson (Wordsworth, 2007), together with seven by his brother R. H. Benson, while nine of Arthur's and ten of Robert's are included in Ghosts in the House (Ash-Tree, 1996); the contents of the joint collections are similar but not identical.

He collaborated with Lord Esher in editing the correspondence of Queen Victoria (1907). His poems and volumes of essays, such as From a College Window, and The Upton Letters (essays in the form of letters) were famous during his time; and he left one of the longest diaries ever written, some four million words. Extracts from the diaries are printed in Edwardian Excursions. From the Diaries of A. C. Benson, 1898–1904, ed. David Newsome, London: John Murray, 1981. His literary criticisms of Dante Gabriel Rossetti, Edward FitzGerald, Walter Pater and John Ruskin, rank among his best work. Today, he is best remembered as the author of the words of one of Britain's best-known patriotic songs, Land of Hope and Glory, written for the coronation of King Edward VII.

A Fellow of the Royal Society of Literature, he founded the Benson Medal in 1916, to be awarded "in respect of meritorious works in poetry, fiction, history and belles lettres".

The modern development of Magdalene was shaped by Benson. He was a generous benefactor to the college with a significant impact on the modern appearance of the college grounds; at least twenty inscriptions around the college refer to him. In 1930, Benson Court was constructed and named after him.