<p>The existing literature has not reached a consensus on the relationship and mechanisms between innovation and income inequality, particularly in the context of urban–rural disparities. To address this issue, we investigate the conditions under which innovation increases or decreases income inequality. We propose that the impact of innovation on income inequality varies across different stages of innovation development. Using provincial-level panel data from China spanning 2009 to 2020, we constructed multiple indicators to measure innovation and found that the impact of innovation on urban–rural income inequality exhibits an inverted U-shaped trend: innovation initially exacerbates urban–rural income inequality and subsequently alleviates it. This phenomenon is influenced by mechanisms such as the learning-by-doing effect, the erosion effect, and industrial structure upgrading. Additionally, our research shows that regional differences in the intensity of these mechanisms account for the heterogeneity in the impact of innovation on income inequality. This study contributes to a deeper understanding of the dual effects of innovation on socio-economic disparities.</p>