Background Social cognitive deficits have been demonstrated in first episode psychosis (FEP) and groups at high risk for developing psychosis but the relative degree of deficit between these groups is unclear. Such knowledge may further our understanding of the importance of these deficits in the development of psychosis. The study aimed to compare the degree of impairment in social cognition in three groups: FEP, those at “ultra high risk” (UHR) for psychosis and healthy controls. Methods UHR and FEP patients were recruited from an established youth mental health service in Melbourne. Three domains of social cognition were assessed: ToM (hinting task and interpretation of visual jokes); facial and vocal emotion recognition (Diagnostic Assessment of Non Verbal Accuracy); social perception (Mayer-Salovey-Caruso Emotional Intelligence Test — managing emotions branch). Group differences were analysed using Analysis of Covariance with age, gender and IQ as covariates. Results Data on 30 UHR, 40 FEP and 30 control participants were analysed. FEP patients performed significantly worse on all social cognition tasks compared to controls. For the UHR group, scores were intermediate between FEP and controls for all tasks, but only significantly different to controls for ToM tasks. Effects sizes were largest for the ToM tasks and the emotion recognition task for both patient groups. There were no significant differences between UHR and FEP patients in performance on any of the tasks. Conclusions Social cognition is generally impaired in FEP patients but there are fewer deficits in a UHR group. Longitudinal research in larger samples is needed to investigate whether social cognition deficits, such as ToM are risk factors in UHR groups for subsequent transition to full-threshold psychosis.