Objective: to assess whether incident mobility disability and neighbourhood deprivation in older people are associated independent of the effects of individual socio-economic status, health behaviours and health status. Methods: prospective cohort study with a 2-year follow-up. Setting: the English Longitudinal Study of Ageing (ELSA), a national probability sample of non-institutionalised older people. Participants: 4,148 participants aged 60 years and over. Measurements: exposure was a census-based index of neighbourhood deprivation [the Index of Multiple Deprivation (IMD)]; outcomes were measured and self-reported incident mobility difficulties. Results: neighbourhood deprivation had a statistically significant effect on physical function following adjustment for individual socio-economic factors, health behaviours and health status. Compared to those living in the least deprived 20% of neighbourhoods, those in the most deprived neighbourhoods had a risk ratio (RR) of incident self-reported mobility difficulties of 1.75 (95% CI 1.14-2.70) and RR of incident-impaired gait speed of 1.63 (95% CI 1.01-2.62). In adjusted models, 4.0 per 100 (95% CI 3.0-5.4) older adults in neighbourhoods in the least deprived 20% had incident mobility difficulties over a 2-year period, whereas 13.6 per 100 (95% CI 10.5-17.4) older adults had incident mobility difficulties in neighbourhoods in the most deprived 20%. Conclusions: older people living in deprived neighbourhoods are significantly more likely to experience incident mobility difficulties than those in less-deprived neighbourhoods. The mechanisms underlying this relationship are unclear and research to identify mechanisms and appropriate interventions is needed.