It has long been surmised that income inequality within a society negatively affects public health. However, more recent studies suggest there is no association, especially when analyzing small areas. This study aimed to evaluate the effect of income inequality on mortality in Switzerland using the Gini index on municipality level. The study population included all individuals >30 years at the 2000 Swiss census (N = 4,689,545) living in 2,740 municipalities with 35.5 million person-years of follow-up and 456,211 deaths over follow-up. Cox proportional hazard regression models were adjusted for age, gender, marital status, nationality, urbanization, and language region. Results were reported as hazard ratios (HR) with 95 % confidence intervals. The mean Gini index across all municipalities was 0.377 (standard deviation 0.062, range 0.202–0.785). Larger cities, high-income municipalities and tourist areas had higher Gini indices. Higher income inequality was consistently associated with lower mortality risk, except for death from external causes. Adjusting for sex, marital status, nationality, urbanization and language region only slightly attenuated effects. In fully adjusted models, hazards of all-cause mortality by increasing Gini index quintile were HR = 0.99 (0.98–1.00), HR = 0.98 (0.97–0.99), HR = 0.95 (0.94–0.96), HR = 0.91 (0.90–0.92) compared to the lowest quintile. The relationship of income inequality with mortality in Switzerland is contradictory to what has been found in other developed high-income countries. Our results challenge current beliefs about the effect of income inequality on mortality on small area level. Further investigation is required to expose the underlying relationship between income inequality and population health.