Psammodrilidae constitutes a family of understudied, nearly completely ciliated, small-sized annelids, whose systematic position in Annelida remains unsettled and whose internal phylogeny is here investigated for the first time. Psammodrilids possess hooked chaetae typical of macroscopic tube-dwelling semi-sessile annelids, such as Arenicolidae. Yet, several minute members resemble, with their conspicuous gliding by ciliary motion and vagile lifestyle, interstitial fauna, adapted to move between sand grains. Moreover, psammodrilids exhibit a range of unique features, for example, bendable aciculae, a collar region with polygonal unciliated cells, and a muscular pumping pharynx. We here present a combined phylogeny of Psammodrilidae including molecular and morphological data of all eight described species (two described herein as Psammodrilus didomenicoi, sp. nov. and P. norenburgi, sp. nov.) as well as four undescribed species. Ancestral character state reconstruction suggests the ancestor of Psammodrilidae was a semi-sessile larger form. Miniaturisation seems to have occurred multiple times independently within Psammodrilidae, possibly through progenesis, yielding small species with resemblance to a juvenile stage of the larger species. We find several new cryptic species and generally reveal an unexpected diversity and distribution of this small family. This success may be favoured by their adaptive morphology, here indicated to be genetically susceptible to progenesis.