The innovative fusion of essential oils with hydrogel engineering offers an optimistic perspective for the design and development of next-generation materials incorporating natural bioactive compounds. This review provides a comprehensive overview of the latest advances in the use of hydrogels containing essential oils for biomedical, dental, cosmetic, food, food packaging, and restoration of cultural heritage applications. Polymeric sources, methods of obtaining, cross-linking techniques, and functional properties of hydrogels are discussed. The unique characteristics of polymer hydrogels containing bioactive agents are highlighted. These include biocompatibility, nontoxicity, effective antibacterial activity, control of the sustained and prolonged release of active substances, optimal porosity, and outstanding cytocompatibility. Additionally, the specific characteristics and distinctive properties of essential oils are explored, along with their extraction and encapsulation methods. The advantages and disadvantages of these methods are also discussed. We have considered limitations due to volatility, solubility, environmental factors, and stability. The importance of loading essential oils in hydrogels, their stability, and biological activity is analyzed. This review highlights through an in-depth analysis, the recent innovations, challenges, and future prospects of hydrogels encapsulated with essential oils and their potential for multiple applications including biomedicine, dentistry, cosmetics, food, food packaging, and cultural heritage conservation.