Background: While international research shows that receipt of welfare benefits is associated with poor mental health, less is known about the relationship between welfare receipt and mental health service use. We investigate whether within-person change in welfare recipient status is associated with change in mental health service use. Methods: Analysis of two waves of data from an Australian national household survey. Random- and fixed-effect models considered the effect of change in welfare receipt status, and assessed whether change in mental health service use differed by type of welfare benefit or the direction of welfare transition. Results: Individuals were more likely to report greater mental health service use at times of welfare receipt. These associations were attenuated, but remained significant, after adjusting for mental health. Increased health service use was not tied to specific types of welfare benefits. The increase in mental health service use associated with a transition onto welfare benefits was much greater than the decline in service use associated with the transition off benefits. Conclusions: Within individuals, welfare receipt is associated with greater mental health service use. While this does reflect poorer mental health at the time of welfare receipt, other factors seem to facilitate health service use.