Freud travelled extensively with her mother as a child, and returned to London at the age of sixteen to train as an actress at The Drama Centre. She has worked in television and theatre as both actress and writer, including an appearance as an alien in the 1985 Doctor Who serial Attack of the Cybermen. Her novels include the semi-autobiographical Hideous Kinky, which was adapted into a film starring Kate Winslet. She is also the author of The Wild, Gaglow, The Sea House. She also wrote the foreword for The Summer Book by Tove Jansson.

Freud was named as one of the 20 'Best of Young British Novelists' by Granta magazine in 1993. Her novels have been translated into thirteen languages. She is also the co-founder (with Kitty Aldridge) of the women's theatre company Norfolk Broads.

In 2009, she donated the short story Rice Cakes and Starbucks to Oxfam's 'Ox-Tales' project, four collections of UK stories written by 38 authors. Her story was published in the 'Water' collection.

Freud has a sister, fashion designer Bella Freud, and a half-brother, Noah Woodman. Her uncle was the late politician and comedian Sir Clement Freud, and two cousins in the media: Matthew and broadcaster Emma. She is married to actor David Morrissey, with whom she has three children and maintains homes in London and Southwold.