The 36-year-old beat off competition from the rower Steve Redgrave, who was second and won the Team of the Year award with his partner, Matthew Pinsent, and the jockey Frankie Dettori who was third.
It is the second time that Hill has won the coveted award, taking it two years ago after he missed out on the world championship to Michael Schumacher by just one point.
Hill, who received his award from last year's winner, the triple jumper Jonathan Edwards, said: "This really has made my year for me. I feel enormously proud to win this award, to stand here amongst the cream of our country's sportsmen. It is a humbling experience."
Thanking the viewers for voting for him again, Hill paid tribute to the BBC and it's veteran motor racing commentator Murray Walker for it's coverage of the sport which it has lost for next season to ITV.
"A lot of credit has got to go to the BBC Grand Prix team for covering the sport so incredibly well over the last 20 years and this season, especially of course to the incredible Murray Walker himself," added Hill.
The boxer Evander Holyfield and the sprinter Michael Johnson were named as joint winners of the Overseas Personality of the Year award the first time it has been shared.
Both men were given their award by Britain's Frank Bruno, who lost his heavyweight title to Tyson. Bruno was presented with a lifetime achievement award by BBC boxing commentator Harry Carpenter.