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Diabetic retinopathy (DR) is a neurovascular complication of diabetes. Recent investigations have suggested that early degeneration of the neuroretina may occur prior to the appearance of microvascular changes; however, the mechanisms underlying this neurodegeneration have been elusive. Microglia are the predominant resident immune cell in the retina and adopt dynamic roles in disease. Here, we show that ablation of retinal microglia ameliorates visual dysfunction and neurodegeneration in a type I diabetes mouse model. We also provide evidence of enhanced microglial contact and engulfment of amacrine cells, ultrastructural modifications, and transcriptome changes that drive inflammation and phagocytosis. We show that CD200-CD200R signaling between amacrine cells and microglia is dysregulated during early DR and that targeting CD200R can attenuate high glucose-induced inflammation and phagocytosis in cultured microglia. Last, we demonstrate that targeting CD200R in vivo can prevent visual dysfunction, microglia activation, and retinal inflammation in the diabetic mouse. These studies provide a molecular framework for the pivotal role that microglia play in early DR pathogenesis and identify a potential immunotherapeutic target for treating DR in patients.