This paper investigates multilevel associations between the common mental disorders of anxiety, depression and economic inactivity measured at the level of the individual and the UK 2001 census ward. The data set comes from the Caerphilly Health & Social Needs study, in which a representative survey of adults aged 18-74 years was carried out to collect a wide range of information which included mental health status (using the Mental Health Inventory (MHI-5) scale of the Short Form-36 health status questionnaire), and socio-economic status (including employment status, social class, household income, housing tenure and property value). Ward level economic inactivity was measured using non-means tested benefits data from the Department of Work and Pensions (DWP) on long-term Incapacity Benefit and Severe Disablement Allowance. Estimates from multilevel linear regression models of 10,653 individuals nested within 36 census wards showed that individual mental health status was significantly associated with ward-level economic inactivity, after adjusting for individual-level variables, with a moderate effect size of -0.668 (standard error=0.258). There was a significant cross-level interaction between ward-level and individual economic inactivity from permanent sickness or disability, such that the effect of permanent sickness or disability on mental health was significantly greater for people living in wards with high levels of economic inactivity. This supports the hypothesis that living in a deprived neighbourhood has the most negative health effects on poorer individuals and is further evidence for a substantive effect of the place where you live on mental health.