Laxey Bay was first protected as a 'Fisheries Restricted Area' in 2009 to facilitate king scallop ranching, whereby the areas could be seeded with scallops, protected from fishing and then harvested at a later date. The bay was seeded with young scallops, however subsequent surveys indicated that densities remained very low, likely owing to limited good scallop habitat within the bay. A Bangor University survey in 2016 surveyed the habitats within the bay. On the basis of the presence of habitats of conservation importance, including maerl and eelgrass, the survey recommended that they bay remain closed to mobile fishing in the long term. The Department of Environment, Food and Agriculture thereafter consulted the public and stakeholders on making the bay a Marine Nature Reserve. Tynwald granted Laxey Bay full statutory protection as a Marine Nature Reserve under the Wildlife Act 1990 from 1 September 2018. It is now one of ten Marine Nature Reserves found around the Isle of Man, covering over 10% of the country's territorial waters. The reserve lies west of a line drawn between two points at the following co-ordinates: Carrick Roayrt by Bulgham Bay and Kione ny Cleigh / Clay Head, up to and including the shore to the level of the Highest Astronomical Tide. The reserve encompasses an area of 3.97 km² which equates to 0.48% of the Island’s territorial seas in the 0-3 nautical mile zone. Laxey Bay MNR also includes a highly protected Eelgrass Conservation Zone within Garwick Bay. The reserve is managed by the Department of Environment, Food and Agriculture in collaboration with its fisheries science advisors and other stakeholders including the fishing industry and recreational users. The Manx Marine Nature Reserves Byelaws 2018 prohibit the extraction of sand, gravel or rock, the deposition of any substance or articles, the use of mobile fishing gear and long lines and the taking of either queen or king scallops whilst diving. Within the Eelgrass Conservation Zone even anchoring and the use of static fishing gear is prohibited to protect eelgrass, a protected Manx species and important marine habitat. While there is currently no speed restrictions for vessels in the reserve, the Isle of Man Government requests mariners have consideration of the impact of high speed on marine animals and other users. The bay is a "core marine area" of the Isle of Man's UNESCO Biosphere Reserve. The rocky coast of Kione ny Cleigh/Clay Head is listed as one of the top 40 geological sites in the Isle of Man and is a candidate Regionally Important Geodiversity Site.
Historically the bay was overfished by the scallop industry, a very environmentally destructive form a fishing, however it is expected the bay will recover in time. Several fish species in the wider Irish Sea, such as cod, herring and skate species have undergone population collapse or decline, which will have impacted populations within the bay. As of 2020, raw, untreated and unfiltered sewage is still discharged into Garwick Bay, bringing with it larges amounts of plastic waste. Both the Laxey River and Gawne River also bring agricultural runoff into the bay, which combined with the sewage, results in both Garwick and Laxey Beaches often failing to achieve minimum bathing water standards during monthly testing.