Despite the strong resemblance to the Challenger 1, the Challenger 2 is an entirely new tank, with only around 5% commonality of parts with its predecessor. It is also unique in being the only post-war British tank to be developed as a private venture. The Challenger 2 features second-generation Chobham composite ceramic armor known as Dorchester which offers an improvement in protection to its predecessor. The turret is the most notable change to the Challenger 1, having clean sides, a more gently sloped front, and the thermal sight prominently moved to the base of the gun. The main armament was also upgraded L30A1 120-mm gun which, maintaining British tradition, features a rifled rather than a smoothbore barrel. The rifling allows it to fire longer range HESH (High Explosive Squash Head) rounds against soft targets and buildings in addition to the standard APFSDS rounds such as the depleted uranium CHARM 3. Other improvements include a new transmission as well as more advanced equipment and optics including a digital fire control system. However, inheriting the same Perkins Condor diesel meant that it too remained somewhat underpowered which was reflected in underwhelming speed. It has also not been as continuously upgraded as the M1 or Leopard 2. Challenger 2s saw their first deployment as part of the KFOR peacekeeping mission in Kosovo in 1999. However, its first taste of combat came in 2003 during the Iraq War, where 120 Challenger 2s were deployed around Basra, suffering no losses to enemy action. Like its predecessor, additional armor to the hull sides was often provided, as well as armor plates for the turret and cage armor to the rear hull and turret; these were frequently seen during combat operations in Iraq. Despite its formidable capabilities and proven combat experience, the Challenger 2 has only been exported to Oman, although the British government has recently pledged a number of tanks will be provided to Ukraine.

Vickers Defence began design of the FV4034 Challenger 2 in the mid-1980s, and prototypes were delivered in 1990 where they competed with the M1A2, Leopard 2A5 and Leclerc MBTs for an initial British Army order to replace half of the Challenger 1 fleet (it was later decided to replace them all). An export version is known as the Challenger 2E is optimized for desert environments and features improved airflow, a German MTU engine, a steering well and upgraded secondary armament. A major upgrade to existing British Army vehicles including a Rheinmetall L55A1 gun is currently planned which will result in the Challenger 3 although this will not involve new production.