In the late 1970s and early 1980s, Daniels was a member of new wave band The Cross, along with fellow actor Peter Hugo Daly. They released an album (Phil Daniels + The Cross) and single, "Kill Another Night" on RCA Records in 1979. His musical inclinations were revealed when he starred in a 1985 British snooker musical Billy the Kid and the Green Baize Vampire. He narrated tracks "Parklife" and "Me, White Noise" on the Parklife and Think Tank albums for Blur.

He made his film debut in 1976, at the age of 17, as a waiter in Bugsy Malone. That same year he had significant roles in three television series; The Molly Wopsies, Four Idle Hands and The Flockton Flyer. However, he had enjoyed an incidental appearance (with fellow drama students) the previous year (1975) in Thames Television's You Must Be Joking! Over the following four years he appeared in Quadrophenia, Breaking Glass and Scum. He also appeared in the 1970s TV drama serial Raven.

Daniels, along with his co-stars, attended a Quadrophenia Reunion at London Film and Comic Con at Earls Court on 1 and 2 September 2007.

Daniels appeared in the 2008 series of Strictly Come Dancing with dancing partner Flavia Cacace. He was the first to be eliminated from the show on 21 September 2008.

He appeared on Celebrity Mastermind: 2008/2009, finishing in second place on 24 points. On 26 June 2009 he appeared on stage with Blur at the M.E.N. Arena and then again on 28 June 2009 at Glastonbury 2009 on their song "Parklife", as well as on 2/3 July 2009 in their Hyde Park Concerts. Daniels portrayed Del Boy's grandfather in a prequel to the comedy series Only Fools and Horses called Rock & Chips, which was screened in January 2010 and, on 13 September 2010 on BBC Radio Five Live, James Buckley confirmed that Rock & Chips would be returning for two specials, one at Christmas 2010, and the other at Easter 2011. Daniels has subsequently reprised his role as Ted Trotter in both of the Rock & Chips specials. 2013 saw the release of the film Vinyl in which Phil Daniels not only stars but also wrote and performs most of the film's music Soundtrack. Directed by Sara Sugarman, Vinyl is the story of an aging rock group forced to con the music industry to gain radio play of Future record releases. The film is based on true events faced by The Alarm that took place in the U.K. in 2004.

Daniels had a long-term relationship with Jan Stevens, who died of pancreatic cancer in 2012. The couple had one daughter, Ella (born c. 1990). He is a Chelsea F.C. fan.

In 2015 it was announced that he would play the role of Thenardier in Les Misérables.

In 2017 he recorded two songs for the album Wit & Whimsy - Songs by Alexander S. Bermange (one solo and one featuring all of the album's 23 artists), which reached No. 1 in the iTunes comedy album chart.