diff --git a/src/test/test.ts b/src/test/test.ts
index f8dae60164..f46839e72c 100644
--- a/src/test/test.ts
+++ b/src/test/test.ts
@@ -78,6 +78,7 @@ export class Suite extends Base implements reporterTypes.Suite {
     fn: Function,
     location: Location,
   }[] = [];
+  _timeout: number | undefined;
 
   _addSpec(spec: Spec) {
     spec.parent = this;
diff --git a/src/test/testType.ts b/src/test/testType.ts
index bbd1745e92..d325a0c0f3 100644
--- a/src/test/testType.ts
+++ b/src/test/testType.ts
@@ -125,9 +125,15 @@ export class TestTypeImpl {
   }
 
   private _setTimeout(timeout: number) {
+    const suite = currentlyLoadingFileSuite();
+    if (suite) {
+      suite._timeout = timeout;
+      return;
+    }
+
     const testInfo = currentTestInfo();
     if (!testInfo)
-      throw new Error(`test.setTimeout() can only be called inside test or fixture`);
+      throw new Error(`test.setTimeout() can only be called from a test file`);
     testInfo.setTimeout(timeout);
   }
 
diff --git a/src/test/workerRunner.ts b/src/test/workerRunner.ts
index 6a824b5da0..a0e025fbaf 100644
--- a/src/test/workerRunner.ts
+++ b/src/test/workerRunner.ts
@@ -243,6 +243,15 @@ export class WorkerRunner extends EventEmitter {
           deadlineRunner.setDeadline(deadline());
       },
     };
+
+    // Inherit test.setTimeout() from parent suites.
+    for (let suite = spec.parent; suite; suite = suite.parent) {
+      if (suite._timeout !== undefined) {
+        testInfo.setTimeout(suite._timeout);
+        break;
+      }
+    }
+
     this._setCurrentTest({ testInfo, testId });
     const deadline = () => {
       return testInfo.timeout ? startTime + testInfo.timeout : undefined;
diff --git a/tests/playwright-test/timeout.spec.ts b/tests/playwright-test/timeout.spec.ts
index 94ce32eb94..04565e7ce0 100644
--- a/tests/playwright-test/timeout.spec.ts
+++ b/tests/playwright-test/timeout.spec.ts
@@ -68,6 +68,35 @@ test('should respect test.setTimeout', async ({ runInlineTest }) => {
   expect(result.output).toContain('Timeout of 1000ms exceeded');
 });
 
+test('should respect test.setTimeout outside of the test', async ({ runInlineTest }) => {
+  const result = await runInlineTest({
+    'a.spec.ts': `
+      const { test } = pwt;
+
+      test.setTimeout(500);
+      test('fails', async ({}) => {
+        await new Promise(f => setTimeout(f, 1000));
+      });
+      test('passes', async ({}) => {
+        await new Promise(f => setTimeout(f, 100));
+      });
+
+      test.describe('suite', () => {
+        test.setTimeout(50);
+        test('fails', async ({}) => {
+          await new Promise(f => setTimeout(f, 100));
+        });
+        test('passes', async ({}) => {
+        });
+      });
+    `
+  });
+  expect(result.exitCode).toBe(1);
+  expect(result.failed).toBe(2);
+  expect(result.passed).toBe(2);
+  expect(result.output).toContain('Timeout of 500ms exceeded');
+});
+
 test('should timeout when calling test.setTimeout too late', async ({ runInlineTest }) => {
   const result = await runInlineTest({
     'a.spec.ts': `