diff --git a/package.json b/package.json
index a5051ff9..5974a8a3 100644
--- a/package.json
+++ b/package.json
@@ -144,6 +144,12 @@
           "default": "",
           "markdownDescription": "Pass additional arguments to the language server."
         },
+        "haskell.serverEnvironment": {
+          "scope": "resource",
+          "type": "object",
+          "default": {},
+          "markdownDescription": "Define environment variables for the language server."
+        },
         "haskell.updateBehavior": {
           "scope": "machine",
           "type": "string",
diff --git a/src/extension.ts b/src/extension.ts
index 0d4bff9f..73bf44c7 100644
--- a/src/extension.ts
+++ b/src/extension.ts
@@ -25,6 +25,11 @@ import { DocsBrowser } from './docsBrowser';
 import { downloadHaskellLanguageServer } from './hlsBinaries';
 import { directoryExists, executableExists, ExtensionLogger, resolvePathPlaceHolders } from './utils';
 
+// Used for environment variables later on
+interface IEnvVars {
+  [key: string]: string;
+}
+
 // The current map of documents & folders to language servers.
 // It may be null to indicate that we are in the process of launching a server,
 // in which case don't try to launch another one for that uri
@@ -212,8 +217,10 @@ async function activateServerForFolder(context: ExtensionContext, uri: Uri, fold
     logger.info(`Activating the language server in the parent dir of the file: ${uri.fsPath}`);
   }
 
+  const serverEnvironment: IEnvVars = workspace.getConfiguration('haskell', uri).serverEnvironment;
   const exeOptions: ExecutableOptions = {
     cwd: folder ? undefined : path.dirname(uri.fsPath),
+    env: Object.assign(process.env, serverEnvironment),
   };
 
   // We don't want empty strings in our args
@@ -231,6 +238,12 @@ async function activateServerForFolder(context: ExtensionContext, uri: Uri, fold
   if (exeOptions.cwd) {
     logger.info(`server cwd: ${exeOptions.cwd}`);
   }
+  if (serverEnvironment) {
+    logger.info('server environment variables:');
+    Object.entries(serverEnvironment).forEach(([key, val]: [string, string | undefined]) => {
+      logger.info(`  ${key}=${val}`);
+    });
+  }
 
   const pat = folder ? `${folder.uri.fsPath}/**/*` : '**/*';
   logger.info(`document selector patten: ${pat}`);
diff --git a/test/suite/extension.test.ts b/test/suite/extension.test.ts
index ac2e118c..08a6aacc 100644
--- a/test/suite/extension.test.ts
+++ b/test/suite/extension.test.ts
@@ -65,6 +65,7 @@ suite('Extension Test Suite', () => {
     await getHaskellConfig().update('logFile', 'hls.log');
     await getHaskellConfig().update('trace.server', 'messages');
     await getHaskellConfig().update('releasesDownloadStoragePath', path.normalize(getWorkspaceFile('bin').fsPath));
+    await getHaskellConfig().update('serverEnvironment', { XDG_CACHE_HOME: path.normalize(getWorkspaceFile('cache-test').fsPath) });
     const contents = new TextEncoder().encode('main = putStrLn "hi vscode tests"');
     await vscode.workspace.fs.writeFile(getWorkspaceFile('Main.hs'), contents);
   });
@@ -99,6 +100,15 @@ suite('Extension Test Suite', () => {
     assert.ok(await withTimeout(30, existsWorkspaceFile('hls.log')), 'Server log not created in 30 seconds');
   });
 
+  test('Server should inherit environment variables defined in the settings', async () => {
+    await vscode.workspace.openTextDocument(getWorkspaceFile('Main.hs'));
+    assert.ok(
+      // Folder will have already been created by this point, so it will not trigger watcher in existsWorkspaceFile()
+      vscode.workspace.getWorkspaceFolder(getWorkspaceFile('cache-test')),
+      'Server did not inherit XDG_CACHE_DIR from environment variables set in the settings'
+    );
+  });
+
   suiteTeardown(async () => {
     disposables.forEach((d) => d.dispose());
     await vscode.commands.executeCommand(CommandNames.StopServerCommandName);