Aim To investigate the severity of acute phase magnetic resonance imaging (MRI) findings and severity of acute illness as risk factors for disability after recovery from encephalitis. Method Children with encephalitis (n = 98; median age 6 years 10 months, interquartile range 3 years–11 years 6 months; 59 males, 39 females) treated in Turku University Hospital during the years 1995 to 2016 were identified in this retrospective cohort study. The acute phase (<2 months of symptom onset) brain MRIs were re‐evaluated and classified based on the severity of neuroimaging finding by a neuroradiologist. Neurological outcome at discharge, at short‐term (<3 months from discharge) follow‐up, and at long‐term (>1 year from discharge) follow‐up was assessed from medical records using the Glasgow Outcome Scale. Results Long‐term recovery was poor in 24 of 82 (29%) children with follow‐up data. Two children died, eight had severe disability, and 14 had moderate disability. Acute phase MRI was available for re‐evaluation from 74 of 82 patients with follow‐up data. The increasing severity of MRI findings was associated with need for ventilator therapy and with poor recovery. Interpretation The risk for poor recovery in paediatric encephalitis is high, and it is associated with the severity of MRI findings. What this paper adds Poor long‐term recovery was found in 29% of children with encephalitis. Severe disability measured by Glasgow Outcome Scale was found in 8%. The most severe neuroimaging findings were a risk factor for severe acute illness and poor long‐term recovery. What this paper adds Poor long‐term recovery was found in 29% of children with encephalitis. Severe disability measured by Glasgow Outcome Scale was found in 8%. The most severe neuroimaging findings were a risk factor for severe acute illness and poor long‐term recovery.