Polycomb repressive complex 1 (PRC1) is an important regulator of gene expression and development. PRC1 contains the E3 ligases RING1A/B, which monoubiquitinate lysine 119 at histone H2A (H2AK119ub1), and has been sub-classified into six major complexes based on the presence of a PCGF subunit. Here, we report that PCGF5, one of six PCGF paralogs, is an important requirement in the differentiation of mouse embryonic stem cells (mESCs) towards a neural cell fate. Although PCGF5 is not required for mESC self-renewal, its loss blocks mESC neural differentiation by activating the SMAD2/TGF-β signaling pathway. PCGF5 loss-of-function impairs the reduction of H2AK119ub1 and H3K27me3 around neural specific genes and keeps them repressed. Our results suggest that PCGF5 might function as both a repressor for SMAD2/TGF-β signaling pathway and a facilitator for neural differentiation. Together, our findings reveal a critical context-specific function for PCGF5 in directing PRC1 to control cell fate.