A part of the Saïd Business School will be known as the Thatcher Business Education Centre in honour of the former prime minister, who died in April.
Baroness Thatcher studied chemistry at Somerville College during the 1940s and worked briefly as a research chemist.
However, Oxford famously declined to give her an honorary degree in 1985. Academics at the institution voted against the move because of cuts to higher education made during her time as prime minister.
The principal benefactor of the school is businessman Wafic Saïd, who is a long-time admirer of Baroness Thatcher and wanted the building to be named after her.
A University of Oxford spokesman said that Mr Saïd’s wish was put before the “appropriate university committees” and has now been approved.
However, the decision could cause controversy as it was not put through Oxford’s Congregation, the “parliament of dons” that oversees the running of the university.
The spokesman said this was because such naming decisions did not have to go through the assembly.
In May this year Mayor of London Boris Johnson called for Oxford to name a college after the late Baroness in lieu of awarding an honorary degree.
Somerville College has launched a scholarship trust in her honour to enable outstanding students from all over the world to study at Oxford.
The Saïd Business School was founded in 1996 and has since become one of the highest ranking business schools in the country.
The school was initially set up with £20 million from Mr Saïd that was matched by the university. He has donated £70 million to date.
The building named after Baroness Thatcher was opened by the Prince of Wales in February. It won a 2013 RIBA National award for architectural excellence.