Allen was born in Denver, Colorado, the son of Martha Katherine, a community service worker, and Gerald M. Dick, a real estate agent. His father died in a car accident, colliding with a drunk driver, when Allen was eleven. Two years later, his mother married her high school sweetheart, a successful business executive, and moved with her six children to Birmingham, Michigan, a suburb of Detroit, to be with her new husband and his three children.

Allen attended Ernest W. Seaholm High School in Birmingham, where he was in theater and music classes (resulting in his love of classical piano), and attended Western Michigan University in Kalamazoo. He later received an honorary degree, which was highlighted for the main plot of the fifth season Home Improvement episode "Doctor in the House".

Allen began his career as a comedian in 1975. On a dare from one of his friends, he participated in a comedy night at a comedy club in Detroit. While in Detroit he began to get recognition appearing in local television commercials and appearing on cable comedy shows such as Gary Thison's Some Semblance of Sanity. He later moved to Los Angeles and became a member of The Comedy Store there. He began to do stand-up appearances on late-night talk shows and specials on record and film.

Allen rose to fame in acting with the television series Home Improvement (1991-1999) on ABC, playing Tim "The Tool-Man" Taylor. During one week in November 1994, he simultaneously starred in the highest grossing film (The Santa Clause) and appeared in the top rated television series (Home Improvement), the following year, he provided the voice of Buzz Lightyear in the blockbuster Toy Story.

Simultaneous with his time acting in Home Improvement, Tim Allen formed a race team with Steve Saleen and race driver Bob Bondurant, called the Saleen/Allen "RRR" Speedlab. The team raced Saleen Mustangs in the SCCA World Challenge, with Allen and Saleen as the team's drivers. On the last season of Home Improvement he received a check of $1.25 million for every episode he starred in.

Allen was nominated for One Emmy and 5 Golden Globe Awards. He won the Golden Globe for Best Actor In A Television Series - Musical or Comedy in 1995.

In 1999, Allen was named a Disney Legend for his work on the Toy Story and Santa Clause. Tim Allen was honored with a star on the Hollywood Walk of Fame .