ObjectivesThis study aimed to compare costs of caring for people with dementia in domiciliary and residential settings, central England. MethodsA cohort of people with dementia was recruited during a hospital stay 2008–2010. Data were collected by interview at baseline, and 6‐ and 12‐month follow‐up, covering living situation (own home with or without co‐resident carer, care home); cognition, health status and functioning of person with dementia; carer stress; utilisation of health and social services; and informal (unpaid) caring input. Costs of formal services and informal caring (replacement cost method) were calculated. Costs of residential and domiciliary care packages were compared. ResultsData for 109 people with dementia were collected at baseline; 95 (87.2%) entered hospital from their own homes. By 12 months, 40 (36.7%) had died and 85% of the survivors were living in care homes. Over one‐half of people with dementia reported social care packages at baseline; those living alone had larger packages than those living with others. Median caring time for co‐resident carers was 400 min/day and 10 h/week for non co‐resident carers. Residential care was more costly than domiciliary social care for most people. When the value of informal caring was included, the total cost of domiciliary care was higher than residential care, but not significantly so. Carer stress reduced significantly after the person with dementia entered a care home. ConclusionsCaring for people with dementia at home may be more expensive, and more stressful for carers, than care in residential settings. Copyright © 2014 John Wiley & Sons, Ltd.