Long‐term N fertilization may increase dryland winter wheat (Triticum aestivum L.) yield but also result in adverse effects, e.g., soil acidity development and water storage or increased N leaching. This study examined if long‐term N fertilization affected the soil water balance and dryland winter wheat yield. We evaluated the effect of five N fertilization rates (0, 45, 90, 135, and 180 kg N ha−1) on the soil water balance, precipitation‐storage efficiency (PSE), winter wheat yield, and water‐use efficiency (WUE) from 2005 to 2010 in an experiment initiated in 1984 in a Heilutu silt loam in the Loess Plateau of China. Soil water contents at wheat planting and harvest were lower with N fertilization than without. Nitrogen fertilization increased soil water storage during the fallow period (SWSF) from 19 to 22%, water uptake during the growing season from 21 to 25%, PSE from 19 to 22%, and evapotranspiration from 7 to 8% compared to no N fertilization. Increased N rate enhanced soil organic C but had no impact on soil pH in 2005. Wheat yield increased up to 244% and WUE to 220% as the N rate increased. Although more soil water was depleted, N fertilization increased winter wheat yield and WUE by enhancing SWSF and PSE, and increased the water holding capacity by increasing soil organic matter compared to no N fertilization. Long‐term N fertilization can increase winter wheat yield by utilizing soil water more efficiently, with minimum impact on soil acidity, in the Chinese Loess Plateau.