The 21-year-old, who came through the ranks at Anfield after joining as a five-year-old, has penned a three-and-a-half-year deal at the Kassam Stadium.
Brannagan spent the second half of last season on loan at Fleetwood Town, helping Uwe Rosler's side reach the League One playoffs.
"It's sad to be leaving Liverpool after such a long time but this is a really exciting challenge," Brannagan told the Oxford United website after completing the move.
"Oxford play good football and I want to come here, play regular football, and help Oxford as much as I can."
Brannagan leaves Liverpool having made nine appearances for the club.