Layer 1 neocortical GABAergic interneurons control the excitability of pyramidal neurons through cell-class-specific direct inhibitory and disynaptic disinhibitory circuitry. The engagement of layer 1 inhibitory circuits during behavior is powerfully controlled by the cholinergic neuromodulatory system. Here we report that acetylcholine (ACh) influences the excitability of layer 1 interneurons in a cell-class and activity-dependent manner. Whole-cell recordings from identified layer 1 interneurons of the rat somatosensory neocortex revealed that brief perisomatic application of ACh excited both neurogliaform cells (NGFCs) and classical-accommodating cells (c-ACs) at rest by the activation of nicotinic receptors. In contrast, under active, action potential firing states, ACh excited c-ACs, but inhibited NGFCs through muscarinic receptor-mediated, IP3 receptor-dependent elevations of intracellular calcium that gated surface-membrane calcium-activated potassium channels. These excitatory and inhibitory actions of ACh could be switched between by brief periods of NGFC action potential firing. Paired recordings demonstrated that cholinergic inhibition of NGFCs disinhibited the apical dendrites of layer 2/3 pyramidal neurons by silencing widespread, GABAB receptor-mediated, monosynaptic inhibition. Together, these data suggest that the cholinergic system modulates layer 1 inhibitory circuits in an activity-dependent manner to dynamically control dendritic synaptic inhibition of pyramidal neurons.