The toponym Woodley is derived from Old English words meaning "a clearing in the wood". Anciently, Woodley was part of the ecclesiastical parish of Sonning.

In the west of Woodley, Old Bulmershe Manor was the home of the Blagrave family and probable birthplace of the 17th-century mathematician, John Blagrave. The adjoining house of Bulmershe Court, otherwise Woodley Lodge, was built in 1777 by James Wheble. The house was subsequently bought by Henry Addington, at that time Speaker of the House of Commons and later Prime Minister. He lived there when not in London and was visited by prominent figures of the age, including William Pitt the Younger and, it is said,[by whom?] King George III. In the Second World War the house was used by the US Army. In the 1960s it was demolished and replaced by a teacher training college that subsequently become part of the University of Reading. The area was sold in 2013/2014 and is now a new housing estate of houses, flats and a care home.

Until the 1930s Woodley was a village of little significance. In that decade, Woodley Aerodrome was opened in a 100-acre (40 ha) field belonging to Sandford Farm. In 1932 F.G. Miles came to Woodley and joined with Philips and Powis in the production of the Miles Hawk aeroplane, leading to the formation of Miles Aircraft Ltd which continued producing aircraft in Woodley until after the Second World War. In the years before the war numerous aviators visited Woodley, including Charles Lindbergh and Amy Johnson; Douglas Bader lost his legs in a flying accident on the airfield in 1931. From 1935 a civilian flying school was operated by the Philips and Powis company, where trainees were prepared for service in the RAF.

Just under 6,000 civil and military aircraft were built and first flown here from 1933 to 1962 and, in 1939, the Phillips & Powis factory installed Britain's first moving track assembly line for aircraft production, to build the Miles Master advanced training aeroplane. Today, Woodley's aviation heritage is commemorated by the Museum of Berkshire Aviation on the southern edge of the former airfield.

After the Second World War, Woodley continued to grow, with industry relocating from Reading, and new housing. In the 1960s the airfield was closed together with its last aircraft factory and a new town centre was created replacing old village shops. The former airfield was redeveloped for housing by Adwest Properties Ltd in the 1980s and Woodley is now largely indistinguishable from Reading.

Woodley has a site of Special Scientific Interest (SSSI) just to the east of the town, called Lodge Wood and Sandford Mill.