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Introduction Universal Credit (UC) was a large-scale reform of the UK welfare system, replacing six existing benefits. UC aimed to simplify claims and encourage more claimants into work. Previous research has found evidence of harm to the mental health of recipients, potentially exacerbating existing health inequalities. We identify the effect of UC on self-reported measures of psychological well-being, treating the phased rollout from 2013 to 2018 as a natural experiment.Methods We estimated differences in psychological well-being outcomes associated with the staggered introduction of the UC across local authorities, using areas where UC was not yet available as controls. We included working-age (aged 18–64 years) respondents of the Annual Population Survey in Great Britain from 2012 to 2019 (n=245 658), living in low-income households. We used the four self-reported measures of psychological well-being recorded in the survey: Life Satisfaction, Happiness, Life Worthwhile and Anxiety. We tested for differential effects by disability, age, caring responsibilities, sex, country, ethnicity, education and household structure.Results UC was associated with per-claimant decreases in Life Satisfaction (−0.66; 95% CI −1.01 to −0.30), Happiness (−0.41; 95% CI −0.77 to −0.05) and Life Worthwhile (−0.73; 95% CI −1.03 to −0.42), and increases in Anxiety (+0.79; 95% CI 0.30 to 1.27). These changes were 2–6 times as large as the effects on well-being of the COVID-19 pandemic. Respondents in Wales and Scotland saw comparatively greater effects compared with those in England across several outcomes. UC exposure saw greater comparative increases in anxiety among people with disabilities (+0.19; 95% CI 0.12 to 0.27), single people (+0.13; 95% CI 0.06 to 0.21) and people aged under 25 years (+0.27; 95% CI 0.15 to 0.39).Conclusions The introduction of UC had adverse effects across all four measures of well-being. Vulnerable groups typically experienced greater harms, reinforcing calls for reforms to UC to reduce the health and well-being impacts of poverty and unemployment.