Grey matter hypointensity on T2-weighted magnetic resonance imaging (MRI) scans, suggesting iron deposition, has been described in multiple sclerosis (MS) and is related to physical disability, disease course and brain atrophy. We tested the hypothesis that subcortical grey matter T2 hypointensity is related to cognitive impairment after adjusting for the effect of MRI lesion and atrophy measures. We studied 33 patients with MS and 14 healthy controls. Normalized T2 signal intensity in the caudate, putamen, globus pallidus and thalamus, total brain T1-hypointense lesion volume (T1LV), fluid-attenuated inversion-recovery-hyperintense lesion volume (FLLV) and brain parenchymal fraction (BPF) were obtained quantitatively. A neuropsychological composite score (NCS) encompassed new learning, attention, working memory, spatial processing and executive function. In each of the regions of interest, the normalized T2 intensity was lower in the MS versus control group (all P<0.001). Regression modelling tested the relative association between all MRI variables and NCS. Globus pallidus T2 hypointensity was the only variable selected in the final model (R2 = 0.301, P = 0.007). Pearson correlations between MRI and NCS were T1LV: r = -0.319; FLLV: r = -0.347; BPF: r = 0.374; T2 hypointensity of the caudate: r = 0.305; globus pallidus: r = 0.395; putamen: r = 0.321; and thalamus: r = 0.265. Basal ganglia T2 hypointensity and BPF demonstrated the strongest associations with cognitive impairment on individual cognitive subtests. Subcortical grey matter T2 hypointensity is related to cognitive impairment in MS, supporting the clinical relevance of T2 hypointensity as a biological marker of MS tissue damage. These data implicate a role for basal ganglia iron deposition in neuropsychological dysfunction.