Her father had been a British Army officer in India and later was a Canadian government official. Her mother was a concert singer. Lillie performed in Ontario towns as part of a family trio with her mother and older sister, Muriel. Eventually, her mother took the girls to London, England, where she made her West End début in the 1914 show Not Likely! In her revues, Lillie used sketches, songs and parodies that won her lavish praise from The New York Times after her 1924 New York début in André Charlot's Revue of 1924, starring Gertrude Lawrence.

Lillie was married, on 20 January 1920, at the church of St. Paul, Drayton Bassett, Fazeley, Staffordshire, England, to Sir Robert Peel, 5th Baronet. Following the marriage, she was known in private life as Lady Peel. She eventually separated from her husband, but the couple never divorced. He died in 1934. Their only child, Sir Robert Peel, 6th Baronet, was killed in action aboard HMS Tenedos (H04) in Colombo Harbour, Ceylon (present-day Sri Lanka) in 1942.

In 1926 she returned to New York City to perform. While there, she starred in her first film, Exit Smiling (1927), opposite fellow Canadian Jack Pickford, the younger brother of Mary Pickford. This was followed by The Show of Shows (1929). After a 1927 tour on the Orpheum Circuit, Lillie made her Broadway debut in Vaudeville at the Palace Theatre in 1928 and performed there frequently after that. She also played at the London Palladium in 1928. On stage, she was long associated with the works of Noël Coward, beginning with This Year of Grace (1928) and giving the first public performance of "Mad Dogs and Englishmen" in Coward's The Third Little Show (1931). Cole Porter and others also wrote songs for her. From the late 1920s until the approach of World War II, Lillie repeatedly crossed the Atlantic to perform on both continents. With Bobby Clark she appeared in London in Walk a Little Faster, and with Bert Lahr she starred in New York in The Show is On (1936).

In 1944, Lillie appeared in the film On Approval. Her few other film appearances included a cameo role as a revivalist in Around the World in 80 Days (1956) and as "Mrs. Meers" (a white slaver) in her last film, Thoroughly Modern Millie (1967).

During World War II, Lillie was an inveterate entertainer of the troops. Before she went on stage one day, she learned that her son was killed in action. She refused to postpone the performance saying "I'll cry tomorrow." In 1948, while touring in the show Inside USA, she met singer/actor John Philip Huck, almost three decades younger, who became her friend and companion, and she boosted his career. As Lillie's mental abilities declined at the end of her career, she relied more and more on Huck, whom her friends viewed with suspicion. In 1977, a conservator was appointed over her property, and she retired to England.

In 1950 she appeared on The Star Spangled Revue with Bob Hope. (This includes the "One Dozen Double Damask Dinner Napkins" Sketch.)

During World War II, Lillie was an inveterate entertainer of the troops. She won a Tony Award in 1953 for her revue An Evening With Beatrice Lillie.

For her contributions to film, in 1960 Beatrice Lillie was awarded a star on the Hollywood Walk of Fame at 6404 Hollywood Blvd. Her portrait, painted by Neysa McMein about 1948 or 1949, is in the collection of The Royal Central School of Speech and Drama in England.

Lillie retired from the stage due to Alzheimer's disease. Julie Andrews remembered that Lillie, as Mrs. Meers in Thoroughly Modern Millie (filmed in 1966 and released in 1967), had to be prompted through her lines and was often confused on set.

Lillie died in 1989, aged 94, at Henley-on-Thames. Huck died of a heart attack 31 hours later and is interred next to her in the Peel family estate's cemetery near Peel Fold, Blackburn.