Gwendoline Riley and I are talking over Zoom very early on the morning of Good Friday; she sits in a neat room, sipping tea from a mug with a cat on it in lieu of the pet she can’t have in her current accommodation - “a literal garret, but that’s probably where I was always going to end up”, she laughs, although she adds that she loves it.

It’s possible that she might be feeling more tolerant of straitened circumstances because her work has just received significant critical – and material – recognition in the shape of a Windham-Campbell prize. These awards are the antithesis of many other hoopla-heavy literary prizes: each year, eight writers across fiction, nonfiction, drama and poetry are given $175,000 (£135,000) to allow them to work with financial ease and security; previous winners include Anne Enright, Margo Jefferson and Yiyun Li. An anonymous jury selects the recipients from a pool of nominations – nominators and their choices also remain undisclosed, with the criteria being excellence across a body of work – and, aside from a select number of events, there’s little of the media circus about the whole affair. They are, quite simply, a boon to writers without obvious additional means, who are all operating in an increasingly challenging marketplace.

What did it feel like to be selected? “Unimaginable. It was just an ordinary, wet Wednesday, and I had an email through. I hadn’t heard of it, but then I did remember seeing Anne Enright getting it, because I remember some of the language she used to describe what it was like to get exactly this kind of call. And then I came up with the phrase ‘Deus Ex Cashmachina’, which I think would work better on the page than when you say it out loud. And then I felt completely overwhelmed. I think they filmed me crying.”

Her novels take around four years each to write and, aside from some ad hoc teaching, she declares herself incapable of making money any other way. And it has been thus for a long time: Riley’s first novel, Cold Water, was published when she was 23, and she is now 47. Having been born in London, she grew up in Wirral on Merseyside before going to university in Manchester; after a few years working odd jobs there, she moved back to London, where she now lives. The “sticky spot” she has found herself in up until now, she says, is that “I was never going to stop writing”, even when the rent was due.

Riley in 2012. Photograph: Sophia Evans/The Observer

“My adrenaline or cortisol levels, or whatever it is, have been so high for as long as I can remember, so to suddenly have the prospect of that being taken away when the money arrives … It’s very odd, because suddenly a sort of counter life opens up. There’s the me who’s going to suddenly be able to relax, and I think that will affect how I write, definitely. And then there’s the me that was the more likely me in most universes, who by this Christmas would have been thinking: Oh God, I’ve got to finish a book as quickly as possible, which for me, is not quick.”

Her home seems a close relative of the studio flat occupied by Laura, the protagonist-narrator of Riley’s seventh novel, The Palm House, who forges a precarious living writing essays and book reviews for a cultural magazine called Sequence. Her great friend there is Edmund Putnam, the deputy editor, who quits his job in despair when the cheerfully philistine Simon “Shove” Halfpenny is brought in by the management to ramp up the magazine’s presence and reach – which in Shove’s mind, means trying to transform a niche, venerable and very English institution into the New Yorker. (Riley is silent on whether there is a similarity here to the Times Literary Supplement; she was married for a decade to its former deputy editor, Alan Jenkins.)

“It’s weird how things happen in books without you realising. You know, at the start, they’re in this little alcove in the back of the pub. And then I realised the whole book, the whole setup, is people finding little alcoves because they’re frightened of the world. And then I thought, oh, England’s a bit like that. It’s just this sort of damp, frightened space where people cower and tell themselves that they’re the civilised ones.”

The Palm House is Riley’s latest attempt to express what it might be like for a woman – usually, like her, from the north of England, highly intelligent and immersed in literature, often with a hinterland of family dysfunction – to live among the self-styled “civilised ones”. Her novels are compact in size, light on obvious plot and stylised in such a way as to appear to be withholding information while in fact telling you all you need to know. They are often horrifying – as in the grim relationship between the narrator and her mother in the much-praised My Phantoms, or the failing marriage in First Love – and brutally funny. Her writing is often described as pitiless and, certainly, one can feel scalded by it.

‘England is this sort of damp, frightened space where people cower and tell themselves that they’re the civilised ones’ … Gwendoline Riley. Photograph: Karolina Heller

For example: just as we’re settling into the ironic undercurrents of life among the Sequence crowd, Laura plunges us back into her past, growing up with her mother and grandmother in a house with no overt neglect or cruelty, but little in the way of affection or communication, which is why, explains Riley, “this poor girl ends up talking into a tape recorder and sending it to someone off the TV, because there’s no one to talk to or interact with at home or get a hug off”. The man off the telly, unfortunately, is a standup comedian who cultivates Laura to hideous, abusive purpose: “There are monsters around us, you know, predators and parasites and, of course, my whole bent is toward human complication.”

She wanted to get at something of the carelessness with which people like Laura are used, whether sexually, socially or professionally – but she also shows her narrator to be resourceful, dogged and acute, and the milieu she finds herself in as an adult to be both open to pastiche and yet treasurable. Among the comic hay she makes of literary life is a scene in which the Sequence staff recall a moment of cultural relevance when Coronation Street’s Ken Barlow spots a colleague at the Weatherfield Recorder reading a copy: “Is he going to be rescued? Has he found someone he can share his intellectual pursuits with? His love of Shakespeare and new wave cinema.”

Riley talks as she writes: on a tightrope, taut and exhilarating. She has, however, tried to make her work a little more expansive. She tells me that she recently saw a little boy on the tube in London – “a scouser, by the way” – whose mother was trying to persuade him to use the handrail. “And he said: ‘No, no, I’m holding my stance so I don’t get flung,’ like a sailor on deck. It was quite sweet. And then I thought: Is there something in my prose that maybe has a little bit of that flavour?”

What kind of book would she like to write? There’s lots, she says, that she hasn’t been able to find a place for in her novels yet, partly because she’s felt so “under the cosh”. Now she’s intrigued to find out what else might be possible. “I never know what’s happening till I do it. I’ve just got a strong sense that it’ll be different. But I’ll probably be saying that till they cart me off, won’t I?”