An array of rapidly inactivating voltage-gated K+ channels is distributed throughout the nervous systems of vertebrates and invertebrates. Although these channels are thought to regulate the excitability of neurons by attenuating voltage signals, their specific functions are often poorly understood. We studied the role of the prototypical inactivating K+ conductance, Shaker, in Drosophila photoreceptors by recording intracellularly from wild-type and Shaker mutant photoreceptors. Here we show that loss of the Shaker K+ conductance produces a marked reduction in the signal-to-noise ratio of photoreceptors, generating a 50% decrease in the information capacity of these cells in fully light-adapted conditions. By combining experiments with modelling, we show that the inactivation of Shaker K+ channels amplifies voltage signals and enables photoreceptors to use their voltage range more effectively. Loss of the Shaker conductance attenuated the voltage signal and induced a compensatory decrease in impedance. Our results demonstrate the importance of the Shaker K+ conductance for neural coding precision and as a mechanism for selectively amplifying graded signals in neurons, and highlight the effect of compensatory mechanisms on neuronal information processing.