His family emigrated in 1820 to Cape Colony, and he was educated in his father's mission school. At an early age Shepstone acquired great proficiency in the native dialects and culture. He served on the governor's staff in the Cape Frontier War of 1834–35 and was appointed British resident in Kaffraria (now in Transkei) in 1839. Success in dealing with various tribes led to his promotion to secretary for native affairs and membership in the executive and legislative council (1856–77) of the newly created colony of Natal. Despite strong opposition, Shepstone uncompromisingly held to the policy that tribal tenure customs be preserved.

Exercising his own authority as supreme chief, Shepstone arranged for the succession of Cetshwayo as king of the Zulus and at his coronation had him swear fealty to Britain and promise to keep the peace. Because of Shepstone's skill in maintaining the peace, the new colonial secretary, Lord Carnarvon (who was anxious to federate the South African territories), called him as a consultant to a London conference on South African affairs in 1876. While in England, he was knighted and empowered to annex the Transvaal, which mission he carried out unopposed in April 1877.

The annexation and his subsequent role as administrator in the Transvaal (1877–79) have given rise to considerable controversy. Critics insist that Shepstone was a crafty, secretive “South African Talleyrand” whose “soaring ambition” led him to employ deceit and intimidation with the Transvaalers when he took over their land and that his high-handed, autocratic rule contributed much to the successful rebellion of the Boers (1880–81). Shepstone retired from public life in 1880, but later he agreed to serve briefly as administrator (1884) in Zululand, where the natives called him “Somtseu” (white father).