Social identities enhance members' well‐being through the provision of social support and feelings of collective efficacy as well as by acting as a basis for collective action. However, the precise mechanisms through which identification acts to enhance well‐being can be complicated by stigmatisation, which potentially undermines solidarity and collective action. The present research examines a real‐world stigmatised community group in order to investigate the following: (1) the community identity processes that act to enhance well‐being and collective action and (2) the consequences of stigmatisation for these processes. Study 1 consisted of a household survey conducted in disadvantaged areas of Limerick city in Ireland. Participants (n = 322) completed measures of community identification, social support, collective efficacy, community action and psychological well‐being. Mediation analysis indicated that perceptions of collective efficacy are an important mediator of the effect of identification upon well‐being. However, levels of self‐reported community action were low and unrelated to community identification. In Study 2, 14 follow‐up multiple‐participant interviews with residents and community group workers were thematically analysed, revealing high levels of stigmatisation, which was reported to lead to disengagement from identity‐related collective action. These findings indicate the potential for stigma to reduce collective action through undermining solidarity and social support. Copyright © 2013 John Wiley & Sons, Ltd.