Gilliam was born in Medicine Lake, Minnesota. His father was a traveling salesman for Folgers before becoming a carpenter. Gilliam has two siblings: a sister two years younger, and a brother ten years younger.

The family moved to California because of his sister's bout of pneumonia, and Terry Gilliam enrolled into Birmingham High School. He became class president, senior Prom King, was voted "Most Likely to Succeed," and got straight As. During high school, he discovered Mad magazine, which was then edited by Harvey Kurtzman; this later influenced his work.

When Gilliam graduated from high school, he attended Occidental College, at first studying physics, then switching to fine arts before finally majoring in political science. Gilliam contributed to the college magazine, Fang, becoming the editor during his junior year and turning it into a tribute to Kurtzman, to whom he later sent copies.

Gilliam was a part of Monty Python's Flying Circus from its formation, at first credited as an animator (his name was listed separately after the other five in the closing credits), later as a full member. His cartoons linked the show's sketches together, and defined the group's visual language in other media (such as LP and book covers, and the title sequences of their films).

Besides doing the animations, he also appeared in several sketches, though he rarely had any main roles and did considerably less acting in the sketches. Instead, he usually played parts that no one else wanted to play (generally because they required a lot of make-up or uncomfortable costumes, such as a recurring knight in armour who would end sketches by walking on and hitting one of the other characters over the head with a plucked chicken) and took a number of small roles in the films, including Patsy in Monty Python and the Holy Grail and the jailer in Life of Brian.

Terry Gilliam started his career as an animator and strip cartoonist; one of his early photographic strips for Help! featured future Python cast-member John Cleese. Moving to England, he animated features for Do Not Adjust Your Set, which also featured future Pythons Eric Idle, Terry Jones, and Michael Palin.

Gilliam's surreal animations for Monty Python have a distinctive style. He mixed his own art, characterized by soft gradients and odd, bulbous shapes, with backgrounds and moving cutouts from antique photographs, mostly from the Victorian era.