Hytner was born in the prosperous suburbs of south Manchester in 1956, to barrister Benet Hytner and his wife, Joyce. He is the eldest child of four, and has described his upbringing as being in "a typical Jewish, cultured family".

He attended Manchester Grammar School and went to University at Trinity Hall, Cambridge, where he studied English. He did some acting whilst at University, including co-scripting and performing in a televised production of the 1977 Cambridge Footlights Revue. However, Hytner did not consider acting his strong point. "I think I was savvy enough when I went to Cambridge to discover I was a poor actor," he said later. He also did some directing, including a production of Bertolt Brecht and Kurt Weill's Rise and Fall of the City of Mahagonny.

After leaving Cambridge, Hytner's first "proper paid job" was as assistant to Colin Graham at English National Opera. Some of his earliest professional directing work was in opera, including at Kent Opera, Wexford Festival Opera and a production of Rienzi at English National Opera. His first theatre productions were at the Northcott Theatre, Exeter. He then directed a series of productions at the Leeds Playhouse, including The Ruling Class by Peter Barnes, an adaptation of Tom Jones and a musical version of Alice in Wonderland. In 1985 he became an Associate Director of the Royal Exchange Theatre, Manchester, a position he retained until 1989.

What Hytner did was to continue directing theatre and opera, including several productions at London's National Theatre (where he had first directed in 1989 with Ghetto). In 1990, he was appointed an Associate Director of the National by its then-Director Richard Eyre. One of the plays he directed was Alan Bennett's The Madness of George III. When a film adaptation was commissioned, Bennett insisted Hytner should direct it, and the retitled The Madness of King George became Hytner's film debut.

In 1994, Eyre announced he would be leaving the National Theatre in three years' time. "[It] made me begin to think about the vision that is needed in such a position and the fact that this needs refreshing under every directorate. I very much felt that you had to have a big idea in order to put yourself forward for such a role and as I didn't have this kind of idea at that time, I decided not to apply," Hytner said later. He continued as an Associate Director at the National until 1997, when the new Director, Trevor Nunn, took up his post.

Hytner directed more films: 1996's The Crucible with Daniel Day-Lewis, and then 1998's The Object of My Affection and 2000's Center Stage (which, unlike his previous films, were not adapted from stage plays). He also spent 15 months developing a film of the musical Chicago, to star Madonna, but the project foundered and was later made with a different Director and cast.

When Trevor Nunn announced that he would be leaving the National Theatre, Hytner "really felt that this time I had a strong sense of what the NT should be doing under a new Director. I had a long conversation with Christopher Hogg, then Chairman of the NT Board, and Tom Stoppard about my ideas for the NT's Future. These included a redefinition of how it might be possible to use the theatre spaces and opening up the NT to new audiences by lowering prices for some performances." Hytner was successful in his application for the post, and his appointment as Director was announced in September 2001. He took over from Nunn in April 2003.

Under Hytner's directorship, the National has innovated with Sunday openings, live cinema broadcasts of NT plays around the world, National Theatre Live, and with its reduced price ticket seasons. These seasons, sponsored by Travelex, have offered large numbers of reduced price seats (for £10 when the scheme was introduced in 2003, with prices rising to £12 from 2011). The reduced price seasons were credited with achieving high usage for the Olivier auditorium – between 90% and 100% full during the summer months compared to a historic average of 65%, with no loss in overall income, and with encouraging a younger and more diverse audience. In 2003 it was reported that one third of the audience for the multiracial production of Henry V in modern dress (directed by Hytner) had never been to the theatre before, and that a large section of the audience for the drama Elmina's Kitchen were black east Londoners new to the National.

He was elected an Honorary Fellow of Trinity Hall, Cambridge, in 2005, and was Visiting Professor of Contemporary Theatre at Oxford University in 2000–01.

Hytner is gay. Although brought up in a Jewish household, Hytner said in 2010, "I'm not a believer, but I do think it is a significant part of my adventure and it fascinates me. I couldn't say I'm a member of the Jewish community or gay community in that I don't seek out either of those communities to hang out with, but it is an important part of who I believe myself to [be]."

Hytner's latest innovation is NT Future, a £70 million scheme (of which £59 million had been raised at October 2012) to open up the National's building and to contribute to the regeneration of the South Bank, to transform facilities for education and participation, and to keep ahead of new technologies and the changing needs of theatre artists and audiences.

Hytner has worked extensively in opera, with many of his productions achieving critical acclaim and commercial success – his English National Opera staging of The Magic Flute was in repertory for 25 years. But Hytner has described himself (to an opera-related audience) as "someone who is unimpressed by his own work on the operatic stage".

In Spring 2014, the Royal Northern College of Music announced it was to confer Honorary Membership of the College upon Hytner.