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A known strategy for improving the properties of layered oxide electrodes in sodium-ion batteries is the partial substitution of transition metals by Li. Herein, the role of Li as a defect and its impact on sodium storage in P2-Na0.67Mn0.6Ni0.2Li0.2O2 is discussed. In tandem with electrochemical studies, the electronic and atomic structure are studied using solid-state NMR, operando XRD, and density functional theory (DFT). For the as-synthesized material, Li is located in comparable amounts within the sodium and the transition metal oxide (TMO) layers. Desodiation leads to a redistribution of Li ions within the crystal lattice. During charging, Li ions from the Na layer first migrate to the TMO layer before reversing their course at low Na contents. There is little change in the lattice parameters during charging/discharging, indicating stabilization of the P2 structure. This leads to a solid-solution type storage mechanism (sloping voltage profile) and hence excellent cycle life with a capacity of 110 mAh g-1 after 100 cycles. In contrast, the Li-free compositions Na0.67Mn0.6Ni0.4O2 and Na0.67Mn0.8Ni0.2O2 show phase transitions and a stair-case voltage profile. The capacity is found to originate from mainly Ni3+/Ni4+ and O2-/O2-δ redox processes by DFT, although a small contribution from Mn4+/Mn5+ to the capacity cannot be excluded.