The town lies within the Anglo-Saxon administrative division of Tandridge hundred.

The original settlement was on the ridge above the modern town and is now called Caterham-on-the-Hill. The modern town in the valley is a product of the Victorian age and the coming of the Caterham railway line in 1856. The Victorian expansion of the town required the building of a much larger parish church (St Mary the Virgin) in 1866 but the old Norman church of St Lawrence was retained and remains directly across the road from St Mary's. As it grew Caterham Valley gained its own church, St. John the Evangelist, which was consecrated in 1882. It is even larger than St. Mary's.

From 1877 Caterham barracks on the hill was a depot for the foot guards regiments. In August 1975 a local public house (the Caterham Arms) which was frequented by soldiers was targeted by an IRA bomb. The barracks were closed in the 1990s and the site redeveloped for housing.

Caterham is the scene of the only murdered police officer in Surrey Police's history.

On 6 July 1974 PCs John Schofield, Ray Fullalove and PS Harley Findlay were on routine patrol in Caterham when they became suspicious of a man on foot carrying a large holdall. They pulled alongside him in their patrol car and started to question him. As PC Fullalove started to get out of the car Egon Von Bulow produced a gun and shot him in the stomach before shooting PC Schofield dead. PS Findlay was also shot but was saved by his breast pocket notebook, which deflected the bullet into his arm.

Von Bulow escaped but was later arrested on the day of PC Schofield’s funeral, which took place at St. Mary’s Church, Caterham, six days later. In March 1975 Von Bulow was sentenced to life imprisonment for Murder. PS Findlay later received the Queen’s commendation for brave conduct.

The North Downs Way, a popular National trail with walkers passes very close to the town.