FBW7 is a crucial component of an SCF-type E3 ubiquitin ligase, which mediates degradation of an array of different target proteins. The Fbw7 locus comprises three different isoforms, each with its own promoter and each suspected to have a distinct set of substrates. Most FBW7 targets have important functions in developmental processes and oncogenesis, including Notch proteins, which are functionally important substrates of SCF(Fbw7). Notch signalling controls a plethora of cell differentiation decisions in a wide range of species. A prominent role of this signalling pathway is that of mediating lateral inhibition, a process where exchange of signals that repress Notch ligand production amplifies initial differences in Notch activation levels between neighbouring cells, resulting in unequal cell differentiation decisions. Here we show that the downstream Notch signalling effector HES5 directly represses transcription of the E3 ligase Fbw7β, thereby directly bearing on the process of lateral inhibition. Fbw7(Δ/+) heterozygous mice showed haploinsufficiency for Notch degradation causing impaired intestinal progenitor cell and neural stem cell differentiation. Notably, concomitant inactivation of Hes5 rescued both phenotypes and restored normal stem cell differentiation potential. In silico modelling suggests that the NICD/HES5/FBW7β positive feedback loop underlies Fbw7 haploinsufficiency. Thus repression of Fbw7β transcription by Notch signalling is an essential mechanism that is coupled to and required for the correct specification of cell fates induced by lateral inhibition.