Aiken was born in Mermaid Street in Rye, Sussex, on 4 September 1924. Her father was the American Pulitzer Prize–winning poet Conrad Aiken (1889–1973). Her older brother was the Writer and research Chemist John Aiken (1913–1990), and her older sister was the Writer Jane Aiken Hodge (1917–2009). Their mother, Canadian-born Jessie MacDonald (1889–1970), was a Master's graduate from Radcliffe College, Cambridge, Massachusetts. Jessie and Conrad's marriage was dissolved in 1929, and Jessie married the English Writer Martin Armstrong in 1930. Conrad Aiken went on to marry twice more. Together with her brother John and her sister Jane, Joan Aiken wrote Conrad Aiken Remembered (1989), a short appreciation of their father.

Aiken was taught at home by her mother until the age of twelve and from 1936 to 1940 at Wychwood School for girls in Oxford. She did not attend university. Writing stories from an early age, she finished her first full-length novel when she was sixteen and had her first short story for adults accepted for publication when she was seventeen. In 1941 her first children's story was broadcast on the BBC's Children's Hour.

Aiken worked for the United Nations Information Centre (UNIC) in London between 1943 and 1949. In 1945 she married Ronald George Brown, a Journalist who was also working at UNIC. They had two children before he died in 1955.

After her husband's death, Aiken joined the magazine Argosy, where she worked in various editorial capacities and, she later said, learned her trade as a Writer. The magazine was one of many in which she published short stories between 1955 and 1960. During this time she also published her first two collections of children's stories and began work on a children's novel, initially titled Bonnie Green, which was later published in 1962 as The Wolves of Willoughby Chase. By then she was able to write full-time from home, producing two or three books a year for the rest of her life, mainly children's books and thrillers, as well as many articles, introductions and talks on children's literature and on the work of Jane Austen.

Some of her books focus on spine-chilling or supernatural events, including The Windscreen Weepers (stories, 1969), The Shadow Guests (novel, 1980), A Whisper in the Night (stories, 1982), and A Creepy Company (stories, 1993, with variant contents in its US and UK editions). She set her adult supernatural novel, The Haunting of Lamb House, at Lamb House in Rye (now a National Trust property). This ghost story recounts in fictional form an alleged haunting experienced by two former residents of the house, Henry James and E. F. Benson, both of whom also wrote ghost stories.

Aiken's series of children's books about Arabel and Mortimer were illustrated by Quentin Blake. Others were illustrated by Jan Pieńkowski and Pat Marriott. Pieńkowski won the foremost British award for children's book illustration, the Greenaway Medal, for The Kingdom Under the Sea and Other Stories (Jonathan Cape, 1971), a collection of "unique fairy tales from Eastern Europe and Russia" retold by Aiken.

Aiken married the New York landscape Painter and Teacher Julius Goldstein in 1976. They divided their time between her home, the Hermitage in Petworth, Sussex, and New York. He died in 2001.

Many of Aiken's most popular books, including the Wolves Chronicles (also known as The Wolves of Willoughby Chase series or the James III series), are set in an elaborate alternative history of Britain in which James II was never deposed in the Glorious Revolution, but supporters of the House of Hanover continually agitate against the monarchy. These books also toy with the geography of London, adding a Canal District among other features. Wolves have invaded the country from Europe via the newly built Channel Tunnel. The novels share a varying cast and a variety of interlinked child protagonists – initially Bonnie Green, but subsequently her itinerant friend Simon, Simon's intrepid Cockney friend Dido Twite (the heroine of most of the books), Dido's half-sister Is and Owen Hughes (son of Dido's Royal Navy ally Captain Hughes).