In N1E-115 cells, neurite retraction induced by neurite remodelling factors such as lysophosphatidic acid, sphingosine 1-phosphate and semaphorin 3A require the activity of phosphatidylinositol 4-phosphate 5-kinases (PIP5Ks). PIP5Ks synthesise the phosphoinositide lipid second messenger phosphatidylinositol(4,5)bisphosphate [PtdIns(4,5)P₂], and overexpression of active PIP5K is sufficient to induce neurite retraction in both N1E-115 cells and cerebellar granule neurones. However, how PIP5Ks are regulated or how they induce neurite retraction is not well defined. Here, we show that neurite retraction induced by PIP5Kβ is dependent on its interaction with the low molecular weight G protein Rac. We identified the interaction site between PIP5Kβ and Rac1 and generated a point mutant of PIP5Kβ that no longer interacts with endogenous Rac. Using this mutant, we show that Rac controls the plasma membrane localisation of PIP5Kβ and thereby the localised synthesis of PtdIns(4,5)P₂ required to induce neurite retraction. Mutation of this residue in other PIP5K isoforms also attenuates their ability to induce neurite retraction and to localise at the membrane. To clarify how increased levels of PtdIns(4,5)P₂ induce neurite retraction, we show that mutants of vinculin that are unable to interact with PtdIns(4,5)P₂, attenuate PIP5K- and LPA-induced neurite retraction. Our findings support a role for PtdIns(4,5)P₂ synthesis in the regulation of vinculin localisation at focal complexes and ultimately in the regulation of neurite dynamics.