The conclusion of Caravaggio also marked the beginning of a temporary abandonment of traditional narrative in Jarman's films. Frustrated by the formality of 35mm film production, and by the dependence on institutions and the resultant prolonged inactivity associated with it (which had already cost him seven years with Caravaggio, as well as derailing several long-term projects), Jarman returned to and expanded the super 8mm-based form he had previously worked in on Imagining October and The Angelic Conversation. Caravaggio was entered into the 36th Berlin International Film Festival, where it won the Silver Bear for an outstanding single achievement.

Jarman was born at the Royal Victoria Nursing Home in Northwood, Middlesex, England. the son of Elizabeth Evelyn (née Puttock) and Lancelot Elworthy Jarman. His father was a military officer, born in New Zealand. He boarded at Canford School in Dorset, and from 1960 studied at King's College London. This was followed by four years at the Slade School of Fine Art, University College London (UCL), starting in 1963. He had a studio at Butler's Wharf, London, in the 1970s. Jarman was outspoken about homosexuality, his public fight for gay rights, and his personal struggle with AIDS.

Jarman first became known as a stage designer, who got his break in the film industry as production designer for Ken Russell's The Devils (1970). He later made his debut in "overground" narrative film making with Sebastiane (1976), about the martyrdom of St. Sebastian. This was one of the first British films to feature positive images of gay sexuality; its dialogue was entirely in Latin.

He followed this with Jubilee (shot 1977, released 1978), in which Queen Elizabeth I of England is seen to be transported forward in time to a desolate and brutal wasteland ruled by her twentieth-century namesake. Jubilee has been described as "Britain's only decent punk film", and among its cast featured punk groups and figures such as Wayne County of Wayne County & the Electric Chairs, Jordan, Toyah Willcox, and Adam and the Ants.

This was followed in 1979 by an unconventional adaptation of Shakespeare's The Tempest. Praised by several Shakespeare scholars, but dismissed by some traditionalist critics, the film contains a considerable amount of nudity (mostly male, but also some female, including a scene in which Caliban's mother Sycorax breast-feeds her son), some unconventional casting (Toyah Willcox as Miranda hardly suggests innocent purity) and an unusual setting (a crumbling mansion as opposed to an island).

During the 1980s, Jarman was a leading campaigner against Clause 28, which sought to ban the "promotion" of homosexuality in schools. He also worked to raise awareness of AIDS. His artistic practice in the early 1980s reflected these commitments, especially in The Angelic Conversation (1985), a film in which the imagery is accompanied by Judi Dench's voice reciting Shakespeare's sonnets.

Jarman was the author of several books including his autobiography Dancing Ledge (1984), which details his life until the age 40. He provides his own insight on the history of gay life in London (60's-80's), discusses his own acceptance of his homosexuality at age 16 and accounts of the financial and emotional hardships of a life devoted to filmmaking. A collection of poetry A Finger in the Fishes Mouth, two volumes of diaries Modern Nature and Smiling In Slow Motion and two treatises on his work in film and art The Last of England (also published as Kicking the Pricks) and Chroma. Other notable published works include film scripts (Up in the Air, Blue, War Requiem, Caravaggio, Queer Edward II and Wittgenstein: The Terry Eagleton Script/The Derek Jarman Film), a study of his garden at Dungeness Derek Jarman's Garden, and At Your Own Risk, a defiant celebration of gay sexuality.

Jarman spent seven years making experimental Super 8mm films and attempting to raise money for Caravaggio (he later claimed to have rewritten the script seventeen times during this period). Released in 1986, Caravaggio attracted a comparatively wide audience; it is still, barring the cult hit Jubilee, probably Jarman's most widely known work. This is partly due to the involvement, for the first time with a Jarman film, of the British television company Channel 4 in funding and distribution. Funded by the British Film Institute and produced by film theorist Colin MacCabe, Caravaggio became Jarman's most famous film, and marked the beginning of a new phase in Jarman's filmmaking career: from now on all his films would be partly funded by television companies, often receiving their most prominent exhibition in TV screenings. Caravaggio also saw Jarman work with Actress Tilda Swinton for the first time. Overt depictions of homosexual love, narrative ambiguity, and the live representations of Caravaggio's most famous paintings are all prominent features in the film.

Jarman also directed the 1989 tour by the UK duo Pet Shop Boys. By pop concert standards this was a highly theatrical event with costume and specially shot films accompanying the individual songs. Jarman was the stage Director of Sylvano Bussotti's opera L'Ispirazione, first staged in Florence in 1998.

By the time of his 1993 film Blue, Jarman was losing his sight and dying of AIDS-related complications. Blue consists of a single shot of saturated blue colour filling the screen, as background to a Soundtrack composed by Simon Fisher Turner, and featuring original music by Coil and other artists, in which Jarman describes his life and vision. When it was shown on British television, Channel 4 carried the image whilst the Soundtrack was broadcast simultaneously on BBC Radio 3. His final testament as a film-maker was the film Glitterbug made for the Arena slot on BBC Two, and broadcast shortly after Jarman's death.

Coil, which in 1994 contributed a Soundtrack for Jarmans The Angelic Conversation released the 7" single 'Themes For Derek Jarman's Blue' after his death. In 2004 Coils Peter Christopherson performed his score for the Jarman short 'The Art of Mirrors' as a tribute to Jarman live at L'étrange Festival in Paris. In 2015 recordlabel Black Mass Rising released a recording of the performance .

The Manic Street Preachers' Bassist, Nicky Wire, also recorded a track titled "Derek Jarman's Garden" as a b-side to his single "Break My Heart Slowly" (2006). On his In The Mist album, released in 2011, ambient Composer Harold Budd features a song called "The Art of Mirrors (after Derek Jarman)".