Wide variations in deprivation exist across England and it is likely that these variations translate into differences in the need for mental health care. Social Services Departments in England account for a substantial proportion of mental health expenditure. It is important that the distribution of expenditure reflects mental health needs. This paper's aims are to (1) describe the development of a new indicator of mental health needs, (2) use the index to explain variations in social services expenditure on mental health, and (3) compare the index with other established measures of need. A principal components analysis of sociodemographic variables considered to be indicators of need was used to produce four distinct factors for 148 Local Authority areas in England. A weighted sum of these factors was used to produce a single index. (Weights were the proportion of variance explained by each factor.) The index was used in a regression model to explain variations in spending on mental health care and was compared with (1) a model containing the four individual factors, (2) the current method of allocating resources, (3) the index used to allocate resources to primary care trusts, (4) the Mental Illness Needs Index (MINI), (5) four indices of deprivation produced by the Office of the Deputy Prime Minister, and (6) the average of the above four indices. The new index could explain 54% of variation, compared with 56% using the current method. The four-factor model could explain 66%, whilst the other models could explain between 37% and 20%. This new index has the advantage that it is not based on previous levels of utilisation or expenditure and yet still explains a comparable amount of variation as the current method. However, a disaggregated model containing individual factors may be preferable.