Good question - I've used this quite commonly. Some ways of rewording it can be, "it completely confounds and annoys me", "it stuns me" or "it makes my head implode." You would use this to mean you cannot tolerate someone's annoying habit, or that a situation is mentally intolerable. I can't stand living in a huge city. It does my head in. Every time I hear that annoying laugh of hers, it does my head in.

to make someone feel confused and unhappy: - Getting up at four o'clock every morning was doing my head in. - I've been trying to make sense of all these figures and it's doing my head in. [http://dictionary.cambridge.org/dictionary/british/do-sb-s-head-in]

When you say that something "does your head in" it means it Annoys or frustrates you. (makes you angry)