Stem cell differentiation involves major chromatin reorganisation, heterochromatin formation and genomic relocalisation of structural proteins, including heterochromatin protein 1 gamma (HP1γ). As the principal reader of the repressive histone marks H3K9me2/3, HP1 plays a key role in numerous processes including heterochromatin formation and maintenance. We find that HP1γ is citrullinated in mouse embryonic stem cells (mESCs) and this diminishes when cells differentiate, indicating that it is a dynamically regulated post-translational modification during stem cell differentiation. Peptidylarginine deiminase 4, a known regulator of pluripotency, citrullinates HP1γ in vitro. This requires R38 and R39 within the HP1γ chromodomain, and the catalytic activity is enhanced by trimethylated H3K9 (H3K9me3) peptides. Mutation of R38 and R39, designed to mimic citrullination, affects HP1γ binding to H3K9me3-containing peptides. Using live-cell single-particle tracking, we demonstrate that R38 and R39 are important for HP1γ binding to chromatin in vivo. Furthermore, their mutation reduces the residence time of HP1γ on chromatin in differentiating mESCs. Citrullination is a novel post-translational modification of the structural heterochromatin protein HP1γ in mESCs that is dynamically regulated during mESC differentiation. The citrullinated residues lie within the HP1γ chromodomain and are important for H3K9me3 binding in vitro and chromatin association in vivo.