Abstract: Since 2014, the urbanization process in China has also entered a new phase of development, with the urbanization rate increasing year by year and the income gap between urban and rural areas narrowing. However, in the long-term trend, the urban-rural income gap has an inverted U-shape, widening and narrowing, with fluctuations. Thus, there is still considerable potential for the urban-rural income gap to widen. Therefore, it is necessary to consider how to reduce the income gap between urban and rural areas, especially in urbanizing environments. In this paper, urbanization was the main focus of the research, and the impact of urbanization on rural-urban income inequality was studied using a VAR model. The results showed that, urbanization reduced rural-urban income inequality in the short run, but increased it in the long run. Economic development always increased the urban-rural income gap, and non-agricultural employment further reduced the urban-rural income gap. In conclusion, it was proposed to reduce the urban-rural income gap through qualitative development of urbanization, active development of rural economy, and optimisation of industrial structure.