4,5-Dimethyl-[1,3]dioxol-2-one (DMDO) was used as a novel electrolyte additive for lithium-ion batteries. The effect of DMDO on the formation of the solid electrolyte interface (SEI) on anode and cathode of MCMB/LiNi0.8Co0.2O2 cells was investigated via a combination of electrochemical methods, X-ray photoelectron spectroscopy (XPS) and density functional theory (DFT) calculations. It is found that cells with electrolyte containing 2% DMDO have better capacity retention than cells without DMDO and this improved performance is ascribed to the assistance of DMDO in forming better SEIs on anode and cathode. DMDO-decomposition products are identified experimentally on the surface of the anode and cathode and supported by theoretical calculations.