Abstract Background Depression is an important, potentially modifiable dementia risk factor. However, it is not known whether effective treatment of depression through psychological therapies is associated with reduced dementia incidence. The aim of this study was to investigate associations between reduction in depressive symptoms following psychological therapy and the subsequent incidence of dementia. Methods National psychological therapy data were linked with hospital records of dementia diagnosis for 119808 people aged 65+. Participants received a course of psychological therapy treatment in Improving Access to Psychological Therapies (IAPT) services between 2012 and 2019. Cox proportional hazards models were run to test associations between improvement in depression following psychological therapy and incidence of dementia diagnosis up to eight years later. Results Improvements in depression following treatment were associated with reduced rates of dementia diagnosis up to 8 years later (HR = 0.88, 95% CI 0.83–0.94), after adjustment for key covariates. Strongest effects were observed for vascular dementia (HR = 0.86, 95% CI 0.77–0.97) compared with Alzheimer's disease (HR = 0.91, 95% CI 0.83–1.00). Conclusions Reliable improvement in depression across psychological therapy was associated with reduced incidence of future dementia. Results are consistent with at least two possibilities. Firstly, psychological interventions to improve symptoms of depression may have the potential to contribute to dementia risk reduction efforts. Secondly, psychological therapies may be less effective in people with underlying dementia pathology or they may be more likely to drop out of therapy (reverse causality). Tackling the under-representation of older people in psychological therapies and optimizing therapy outcomes is an important goal for future research.