Information that is congruent with prior knowledge is generally remembered better than incongruent information. This effect of congruency on memory has been attributed to a facilitatory influence of activated schemas on memory encoding and consolidation processes, and hypothesised to reflect a shift between processing in medial temporal lobes (MTL) towards processing in medial prefrontal cortex (mPFC). To investigate this shift, we used functional magnetic resonance imaging (fMRI) to compare brain activity during paired-associate encoding across three levels of subjective congruency of the association with prior knowledge. Participants indicated how congruent they found an object-scene pair during scanning, and were tested on item and associative recognition memory for these associations one day later. Behaviourally, we found a monotonic increase in memory performance with increasing congruency for both item and associative memory. Moreover, as hypothesised, encoding-related activity in mPFC increased linearly with increasing congruency, whereas MTL showed the opposite pattern of increasing encoding-related activity with decreasing congruency. Additionally, mPFC showed increased functional connectivity with a region in the ventral visual stream, presumably related to the binding of visual representations. These results support predictions made by a recent neuroscientific framework concerning the effects of schema on memory. Specifically, our findings show that enhanced memory for more congruent information is mediated by the mPFC, which is hypothesised to guide integration of new information into a pre-existing schema represented in cortical areas, while memory for more incongruent information relies instead on automatic encoding of arbitrary associations by the MTL.