OBJECTIVES: There is a need to develop a payment system for services for children with mental health problems that allows more targeted commissioning based on fairness and need. This is currently constrained by lack of clinical consensus on the best way forward, wide variation in practice, and lack of data about activity and outcomes. In the context of a national initiative in England our aim was to develop a basis for an improved payment system. METHODS: Three inter-related studies: a qualitative consultation with child and adolescent mental health services (CAMHS) stakeholders on what the key principles for establishing a payment system should be, via online survey (n = 180) and two participatory workshops (n = 91); review of relevant national clinical guidelines (n = 15); and a quantitative study of the relationship between disorders and resource use (n = 1774 children from 23 teams). RESULTS: CAMHS stakeholders stressed the need for a broader definition of need than only diagnosis, including the measurement of indirect service activities and appropriate outcome measurement. National clinical guidance suggested key aspects of best practice for care packages but did not include consideration of contextual factors such as complexity. Modelling data on cases found that problem type and degree of impairment independently predicted resource use, alongside evidence for substantial service variation in the allocation of resources for similar problems. CONCLUSIONS: A framework for an episode-based payment system for CAMHS should include consideration of: complexity and indirect service activities; evidence-based care packages; different needs in terms of impairment and symptoms; and outcome measurement as a core component.