Abstract Aims To assess the cost‐effectiveness of dapagliflozin, a sodium–glucose co‐transporter–2 ( SGLT –2) inhibitor, compared with a sulfonylurea, when added to metformin for treatment of UK people with Type 2 diabetes mellitus inadequately controlled on metformin alone. Methods Clinical inputs sourced from a head‐to‐head randomized controlled trial ( RCT ) informed the Cardiff diabetes decision model. Risk equations developed from the United Kingdom Prospective Diabetes Study ( UKPDS ) were used in conjunction with the clinical inputs to predict disease progression and the incidence of micro‐ and macrovascular complications over a lifetime horizon. Cost and utility data were generated to present the incremental cost‐effectiveness ratio ( ICER ) for both treatment arms, and sensitivity and scenario analyses were conducted to assess the impact of uncertainty on the final model results. Results The dapagliflozin treatment arm was associated with a mean incremental benefit of 0.467 quality‐adjusted life years ( QALY s) [95% confidence interval ( CI ): 0.420; 0.665], with an incremental cost of £1246 (95% CI : £613; £1637). This resulted in an ICER point estimate of £2671 per QALY gained. Incremental costs were shown to be insensitive to parameter variation, with only treatment‐related weight change having a significant impact on the incremental QALY s. Probabilistic sensitivity analysis determined that dapagliflozin had a 100% probability of being cost‐effective at a willingness‐to‐pay threshold of £20 000 per QALY . Conclusions Dapagliflozin in combination with metformin was shown to be a cost‐effective treatment option compared with sulfonylurea from a UK healthcare perspective for people with Type 2 diabetes mellitus who are inadequately controlled on metformin monotherapy.