Previous research has suggested that psychotic symptoms are associated with impairments in social cognition. However, there is limited research evaluating this association in the context of younger patients with a broad range of mental health problems. In the present study, we evaluated social cognitive performance in 115 treatment-seeking participants who presented to a youth mental health service with affective or psychotic disturbances. Participants completed symptom severity measures, a social cognition task (the Reading the Mind in the Eyes Test (RMET)), and a standardised battery of neuropsychological tests. Analyses based on diagnostic groups showed that patients with psychotic illnesses (n =23) showed impaired performance on the RMET compared to patients with primarily bipolar (n =40) and depressive illnesses (n =52). Performance on the RMET was negatively correlated with positive and negative psychotic symptoms, but not affective and anxiety symptoms. Performance on the RMET also was the strongest concurrent predictor of positive psychotic symptoms in a regression model that also included predicted intelligence, demographic variables, and neurocognition. RMET performance did not, however, predict negative symptoms above tests of sustained attention and verbal learning, nor was performance associated with any other symptoms of mental illness. Social cognitive impairments may provide a valuable marker for the presence of positive psychotic symptoms in young people with mental illness. Additionally, these impairments may have a role in the aetiology and maintenance of psychotic symptoms. Research is now needed to establish the nature of the relationship between social cognition and psychotic symptoms across different facets of social cognition. Research is also needed to investigate whether targeted social cognition treatments reduce risk for the development of positive psychotic symptoms.