Objectives <p>Self-compassion is characterized by a self-directed sense of kindness, recognition of common humanity, and mindfulness in times of suffering or perceived inadequacy. There is strong evidence that self-compassion improves both facets of mental health, including higher psychological well-being and lower levels of psychopathology. However, the specific mechanisms through which self-compassion improves mental health are still subject to study and debate.</p> Methods <p>This systematic review examined mediators and neurophysiological processes in this relationship according to the PRISMA guidelines. All types of empirical studies were included, as long as a mediation analysis was performed, and studies examining potential neurophysiological mechanisms had to be experimental or longitudinal in design. A total of 85 studies (<i>n</i> = 26,187) of different designs and age groups were included. Based on our review, we introduce a transactional model that links self-compassion and mental health.</p> Results <p>We argue that changes in self-compassion, psychological coping, and emotion regulation, self-concept, and changes in cognitive style mutually enhance each other. We further propose that changes in self-compassion and emotion regulation are mediated through different neurophysiological processes that initiate a cascade of physiological adjustments.</p> Conclusions <p>This review integrates research on the mechanisms linking self-compassion and mental health and presents insights for researchers, clinicians, and other practitioners. Through an improved theoretical understanding of how self-compassion affects mental health, interventions can be improved to benefit both clinical and non-clinical populations.</p> Preregistration <p>This study was preregistered at PROSPERO (CRD42024507763).</p>