Primary cilia interpret vertebrate Hedgehog (Hh) signals. Why cilia are essential for signaling is unclear. One possibility is that some forms of signaling require a distinct membrane lipid composition, found at cilia. We found that the ciliary membrane contains a particular phosphoinositide, PI(4)P, whereas a different phosphoinositide, PI(4,5)P₂, is restricted to the membrane of the ciliary base. This distribution is created by Inpp5e, a ciliary phosphoinositide 5-phosphatase. Without Inpp5e, ciliary PI(4,5)P₂ levels are elevated and Hh signaling is disrupted. Inpp5e limits the ciliary levels of inhibitors of Hh signaling, including Gpr161 and the PI(4,5)P₂-binding protein Tulp3. Increasing ciliary PI(4,5)P₂ levels or conferring the ability to bind PI(4)P on Tulp3 increases the ciliary localization of Tulp3. Lowering Tulp3 in cells lacking Inpp5e reduces ciliary Gpr161 levels and restores Hh signaling. Therefore, Inpp5e regulates ciliary membrane phosphoinositide composition, and Tulp3 reads out ciliary phosphoinositides to control ciliary protein localization, enabling Hh signaling.