BACKGROUND In England, although some studies report better health among rural populations, few have examined social inequalities in health within rural areas and how they compare to inequalities observed in urban settings. The objectives of this study are to examine (i) whether living in rural, in more affluent and in more socially cohesive areas is associated with better mental health; and (ii) whether being in employment is more protective for mental health in rural than in urban areas. METHODS Data on common mental disorders (CMD) and socio-demographic characteristics of 12 962 adults are from the Health Survey for England. Individuals resided in 892 areas categorized as urban or rural. Area deprivation is measured using the employment deprivation domain from the 2004 Index of Multiple Deprivation. Area social cohesion is derived from individuals' perceptions using ecometric procedures. Data are analysed using multilevel logistic models. RESULTS Living in rural areas is significantly associated with lower risk of reporting CMD [odds ratio (OR): 0.81; 95% confidence interval (CI): 0.71-0.92], independently of individuals' characteristics, and of area deprivation and social cohesion. The mental health advantage of being in employment is more important in rural areas (OR: 0.74; 95% CI: 0.58-0.95) than in urban settings. CONCLUSIONS Living in rural areas is associated with better overall mental health. Yet inequalities in mental health between people in the workforce and those who are not are more important in rural settings. More studies are needed to understand the patterning of social inequalities in health in rural communities.