As a soldier in the Hanoverian Army (commissioned in 1778), Scharnhorst distinguished himself in Belgium in the campaigns against the French Revolutionary forces in the 1790s. In 1801 Scharnhorst applied for service in the Prussian Army in an extraordinary way. He asked the King of Prussia to make him a lieutenant colonel, to raise him to the nobility, and to permit him to reorganize the Prussian Army. To show his qualifications, he enclosed three military essays with his application. Surprisingly, his request was approved. By 1804, when he was ennobled, all his conditions had been granted. He began his Prussian service at the war academy in Berlin, where one of his pupils was Karl von Clausewitz, later a noted writer on strategy.

In the Napoleonic campaign of 1806, Scharnhorst, along with Gebhard von Blücher, was taken prisoner after the Battle of Jena but was soon released in an exchange of prisoners. Although brought up in the military tradition of Frederick the Great, he was one of the first to realize the necessity for conscripted citizen armies rather than small, long-service, professional mercenary forces. He also realized that national service must be accompanied by political reform.

His appointment as head of the Army Reform Commission after the Peace of Tilsit gave him access to the King, but Napoleon soon became suspicious of Scharnhorst's activities and forced the King to cancel many of the proposed reforms. When Prussia was forced into an alliance (1811–12) with France against Russia, Scharnhorst went on indefinite leave. He later returned to service and in 1813 was made chief of staff to Blücher. In the Battle of Lützen (May 2), he received a wound from which he never recovered. He died in Prague, where he had gone to negotiate for Austria's entry into the war.