Mg0.05Zn0.95O thin films were prepared on silicon substrates by a sol–gel dip-coating technique. Microstructure, surface topography and optical properties of the thin films were characterized by X-ray diffraction, atom force microscopy, Fourier transform infrared spectrophotometer and fluorescence spectrometer. The results show that the thin film annealed at 700 °C has the largest average grain size and exhibits the best c-axis preferred orientation. As annealing temperature increases to 800 °C, the grain along c-axis has been suppressed. Roughness factor and average particle size increase with the increase of annealing temperature. The IR absorption peak appearing at about 416 cm−1 is assigned to hexagonal wurtzite ZnO. The thin film annealed at 700 °C has the maximum oxygen vacancy, which can be inferred from the green emission intensity. Photocatalytic results show that the thin film annealed at 700 °C exhibits remarkable photocatalytic activity, which may be attributed to the larger grain size, roughness factor and concentration of oxygen vacancy. Enhanced photocatalytic activity of Mg0.05Zn0.95O thin films after a cycle may be attributed to the increase of surface oxygen vacancy and photocorrosion of amorphous MgO on the surface of thin film under UV irradiation.