Bettany was born in Harlesden, London, the son of Thane Bettany, an actor and drama teacher, and Anne Kettle, a stage singer and latterly school secretary. He has an older sister, Sarah, and a younger brother, Matthew. While Thane taught at the all-girls boarding school Queenswood School in Hertfordshire, the family had residence on the campus.

Matthew died after a fall at Queenswood when he was only eight years old, which left the family grief-stricken. Soon after, Paul left home and went to live on his own in London, while his parents later divorced. He lived in a small flat and earned money by playing his guitar in the streets, busker style. After two years, he found a new job in a home for the elderly.