Compacted bentonite is envisaged as engineering buffer/backfill material in geological disposal for high-level radioactive waste. In particular, Na-bentonite is characterised by lower hydraulic conductivity and higher swelling competence and cation exchange capacity, compared with other clays. A solid understanding of the hydraulic behaviour of compacted bentonite remains challenging because of the microstructure expansion of the pore system over the confined wetting path. This work proposed a novel theoretical method of pore system evolution of compacted bentonite based on its stacked microstructure, including the dynamic transfer from micro to macro porosity. Furthermore, the Kozeny–Carman equation was revised to evaluate the saturated hydraulic conductivity of compacted bentonite, taking into account microstructure effects on key hydraulic parameters such as porosity, specific surface area and tortuosity. The results show that the prediction of the revised Kozeny–Carman model falls within the acceptable range of experimental saturated hydraulic conductivity. A new constitutive relationship of relative hydraulic conductivity was also developed by considering both the pore network evolution and suction. The proposed constitutive relationship well reveals that unsaturated hydraulic conductivity undergoes a decrease controlled by microstructure evolution before an increase dominated by dropping the gradient of suction during the wetting path, leading to a U-shaped relationship. The predictive outcomes of the new constitutive relationship show an excellent match with laboratory observation of unsaturated hydraulic conductivity for GMZ and MX80 bentonite over the entire wetting path, while the traditional approach overestimates the hydraulic conductivity without consideration of the microstructure effect.