Filamentous fungi have potential as an alternative protein source for use in aquafeeds due to their high protein content and bioactive components. Paecilomyces variotii (PEKILO® mycoprotein) is a β-glucan- and nucleotide-rich filamentous fungi with a crude protein (CP) content of 60–70%. A 9-week feeding trial was conducted to evaluate the effects of P. variotii in diets for Atlantic salmon (initial average body weight of 24 g fish−1) reared in freshwater. Four experimental diets were formulated. Diet 1 was a control diet based on fish meal, soy protein concentrate, and wheat gluten meal. Diets 2, 3, and 4 were formulated so that P. variotii replaced 5, 10, and 20% of the CP content of the diets, respectively. Results showed that dietary inclusion of P. variotii was associated with changes in physical pellet quality, including significant linear (p < 0.0001) and/or quadratic (p < 0.01) decreases in pellet length, width, expansion, and durability. Conversely, significant linear (p < 0.0001) and quadratic (p < 0.025) increases in water activity, bulk density, and water stability index were associated with increasing replacement of the CP content of the diets with P. variotii. There were no significant differences in weight gain, growth rate or feed intake among fish fed the experimental diets (p > 0.05), but a significant linear improvement (p < 0.025) in feed conversion ratio (FCR) with increasing dietary inclusion of P. variotii was observed. The apparent digestibility coefficients for CP and gross energy of the experimental diets decreased linearly (p < 0.01) with increasing dietary levels of P. variotii. Similar results were observed for the essential and non-essential amino acids. Despite reduced digestibility, linear increases in nitrogen (p < 0.01), energy (p < 0.025), and mineral (p < 0.001) retention efficiencies were associated with increasing dietary levels of P. variotii. In the distal intestine, dietary inclusion of P. variotii resulted in significant (p < 0.05) upregulation of several cytokines (ifng, il10, and tgfb), effector molecules (inos, arg1, sod), and transcription factors (irf4), suggesting both activation and control of the inflammatory response in this key mucosa-associated lymphoid tissue. Overall, replacement of 20% of the CP content of the diet with P. variotii reduced digestibility of the experimental diets, but did not affect growth performance and improved FCR and nutrient utilization efficiency of salmon. Thus, P. variotii is a promising ingredient with potential for use in salmonid aquafeeds to improve fish performance and health. •P. variotii can replace 20% of the crude protein content in diets for Atlantic salmon.•Dietary inclusion of P. variotii significantly improved feed conversion ratio.•P. variotii was associated with increases in nutrient utilization efficiency.•P. variotti was associated with improved gut health.•P. variotii exhibited immuno-modulatory capacity in the distal intestine of salmon.