Lithium is a first-line therapy for bipolar affective disorder. However, various adverse effects, including a Parkinson-like hand tremor, often limit its use. The understanding of the neurobiological basis of these side effects is still very limited. Nigral iron elevation is also a feature of Parkinsonian degeneration that may be related to soluble tau reduction. We found that magnetic resonance imaging T2 relaxation time changes in subjects commenced on lithium therapy were consistent with iron elevation. In mice, lithium treatment lowers brain tau levels and increases nigral and cortical iron elevation that is closely associated with neurodegeneration, cognitive loss and parkinsonian features. In neuronal cultures lithium attenuates iron efflux by lowering tau protein that traffics amyloid precursor protein to facilitate iron efflux. Thus, tau- and amyloid protein precursor-knockout mice were protected against lithium-induced iron elevation and neurotoxicity. These findings challenge the appropriateness of lithium as a potential treatment for disorders where brain iron is elevated (for example, Alzheimer's disease), and may explain lithium-associated motor symptoms in susceptible patients.Molecular Psychiatry advance online publication, 12 July 2016; doi:10.1038/mp.2016.96.