The cyp125 gene of Rhodococcus jostii RHA1 was previously found to be highly upregulated during growth on cholesterol and the orthologue in Mycobacterium tuberculosis (rv3545c) has been implicated in pathogenesis. Here we show that cyp125 is essential for R. jostii RHA1 to grow on 3-hydroxysterols such as cholesterol, but not on 3-oxo sterol derivatives, and that CYP125 performs an obligate first step in cholesterol degradation. The involvement of cyp125 in sterol side-chain degradation was confirmed by disrupting the homologous gene in Rhodococcus rhodochrous RG32, a strain that selectively degrades the cholesterol side-chain. The RG32Ωcyp125 mutant failed to transform the side-chain of cholesterol, but degraded that of 5-cholestene-26-oic acid-3β-ol, a cholesterol catabolite. Spectral analysis revealed that while purified ferric CYP125RHA1 was < 10% in the low-spin state, cholesterol (KDapp = 0.20 ± 0.08 μM), 5α-cholestanol (KDapp = 0.15 ± 0.03 μM) and 4-cholestene-3-one (KDapp = 0.20 ± 0.03 μM) further reduced the low spin character of the haem iron consistent with substrate binding. Our data indicate that CYP125 is involved in steroid C26-carboxylic acid formation, catalysing the oxidation of C26 either to the corresponding carboxylic acid or to an intermediate state.