Introduction: The COVID-19 pandemic interrupted participation in the labour force and may have affected mental health, both directly through the effects of illness and isolation and indirectly through negative effects on employment. Former military personnel may be at particular risk as a result of both additional exposure to risk factors for poor mental health and barriers to labour market participation raised by the transition from military to civilian working environments. This article examines furlough and unemployment as a result of the COVID-19 pandemic among UK working-age ex-service personnel and its associations with poor mental health. Methods: Participants from an existing cohort study of Iraq- and Afghanistan-era UK Armed Forces personnel were invited to provide information on employment before the COVID-19 pandemic and how it has changed since the pandemic. Mental health was measured using the General Health Questionnaire and compared with data collected pre-pandemic. Results: Although Veteran unemployment is not higher than civilian unemployment (4.7% and 4.8%, respectively, in September 2020), it rose during the pandemic from a lower level (1.3%). Part-time and self-employed Veterans were more likely than full-time employees to experience furlough or unemployment. A negative impact on employment was associated with the onset of new mental ill health. Discussion: Employment of ex-service personnel was more negatively affected by the COVID-19 pandemic, possibly because ex-service personnel are mostly men, and men were more affected in the UK general population. This employment instability has negative consequences for mental health that are not mitigated by furlough.