Waterman was born in Clapham, London, and his career began in childhood. In 1961, at the age of 13, he played the part of Winthrop Paroo in the Adelphi Theatre production of The Music Man. A year later, he starred as William Brown in the BBC TV series William based on the Just William books of Richmal Crompton.

Waterman was a series regular in the 1962 CBS comedy Fair Exchange, playing teenage son Neville Finch. He had a major role in the 1968 film Up The Junction.

In the early 1970s he played the brother of a victim of Count Dracula (Christopher Lee) in the Hammer film production Scars of Dracula (1970), and the boyfriend of Susan George in "Fright" (1971). He started to build a name for himself with regular appearances on the BBC's Play for Today series, most notably in the Dennis Potter dramas Follow the Yellow Brick Road (1972) and Joe's Ark (1974). Both were directed by Alan Bridges.

He became well known and something of a pin-up as DS George Carter in The Sweeney, during the 1970s. As well as starring in Minder, he sang the theme tune, "I Could Be So Good For You", which was a top three UK hit in 1980 and a top 10 hit in Australia, and had a brief singing career. He recorded a song with George Cole "What are we gonna get for 'er indoors". It is sometimes incorrectly believed that he wrote "I Could Be So Good For You", due to the song being credited to 'Waterman/Kenny'. In fact, it was his then wife Patricia Waterman who co-wrote the song with fellow songwriter Gerard Kenny.

In 1976 Waterman released his first album titled "Downwind of Angels", arranged and produced by Brian Bennett. A single "I Will Glide" was released from the album but did not enter the top 40. The backing singers on "I Will Glide" are the Belmont School choir, where Brian Bennett's son, Warren, was a pupil.

In 1981, Waterman starred in a Television film made by Tyne Tees Television entitled The World Cup: A Captain's Tale. It was the true story of West Auckland F.C., a part-time side who won the 'first' World Cup, known as the Sir Thomas Lipton Trophy. Waterman played the part of Bob Jones , the Club Captain. It cost £1.5 million to make and shooting took place in the North East and in Turin in Italy. Scenes were shot in Durham pit villages and in Ashington where goal posts and a grandstand were erected in a public park with a colliery headframe in the background. Local players took part, donning long pants and high sided boots of the day, and even suffering "short back and sides" haircuts. The production has several comedy sequences, including a meeting of the club committee and a meeting of the Football Association Council when the suggestion of an English team participating in the new competition received a luke-warm and cynical response from the members. Also on the agenda is the F.A. Cup draw which is done in the conventional manner and immediately dispatched direct from the council chamber to the clubs – "by carrier pigeons", let out of the windows.

In 1982, Waterman starred in an often overlooked musical, Windy City. A relatively short lived production, it also featured such names as Anton Rodgers, Diane Langton, Victor Spinetti and Amanda Redman who Waterman also had an 18 month affair with during the lifetime of the musical and later went on to star with in the TV series New Tricks. The show closed on February 26, 1983 after 250 performances.

In 1986 he took the lead male role in the BAFTA Award winning BBC adaptation of Fay Weldon's The Life and Loves of a She-Devil.

Waterman also sang the theme tunes to three more programmes in which he appeared: the comedy drama Stay Lucky with Jan Francis (Yorkshire Television/ITV 1989), sitcom On the Up (BBC 1990) and crime drama New Tricks (Wall to Wall television for BBC, 2003).

Waterman recited excerpts from the journal of Walter Thompson for the UKHistory series Churchill's Bodyguard.