diff --git a/homeassistant/components/update/__init__.py b/homeassistant/components/update/__init__.py
index cd52de6550f..90495871cb2 100644
--- a/homeassistant/components/update/__init__.py
+++ b/homeassistant/components/update/__init__.py
@@ -181,7 +181,7 @@ class UpdateEntityDescription(EntityDescription, frozen_or_thawed=True):
 
 @lru_cache(maxsize=256)
 def _version_is_newer(latest_version: str, installed_version: str) -> bool:
-    """Return True if version is newer."""
+    """Return True if latest_version is newer than installed_version."""
     return AwesomeVersion(latest_version) > installed_version
 
 
@@ -384,6 +384,11 @@ class UpdateEntity(
         """
         raise NotImplementedError
 
+    def version_is_newer(self, latest_version: str, installed_version: str) -> bool:
+        """Return True if latest_version is newer than installed_version."""
+        # We don't inline the `_version_is_newer` function because of caching
+        return _version_is_newer(latest_version, installed_version)
+
     @property
     @final
     def state(self) -> str | None:
@@ -399,7 +404,7 @@ class UpdateEntity(
             return STATE_OFF
 
         try:
-            newer = _version_is_newer(latest_version, installed_version)
+            newer = self.version_is_newer(latest_version, installed_version)
         except AwesomeVersionCompareException:
             # Can't compare versions, already tried exact match
             return STATE_ON
diff --git a/tests/components/update/test_init.py b/tests/components/update/test_init.py
index 7860c679f37..6082e0ecfe7 100644
--- a/tests/components/update/test_init.py
+++ b/tests/components/update/test_init.py
@@ -3,6 +3,7 @@
 from collections.abc import Generator
 from unittest.mock import MagicMock, patch
 
+from awesomeversion import AwesomeVersion, AwesomeVersionStrategy
 import pytest
 
 from homeassistant.components.update import (
@@ -956,3 +957,43 @@ async def test_deprecated_supported_features_ints_with_service_call(
             },
             blocking=True,
         )
+
+
+async def test_custom_version_is_newer(hass: HomeAssistant) -> None:
+    """Test UpdateEntity with overridden version_is_newer method."""
+
+    class MockUpdateEntity(UpdateEntity):
+        def version_is_newer(self, latest_version: str, installed_version: str) -> bool:
+            """Return True if latest_version is newer than installed_version."""
+            return AwesomeVersion(
+                latest_version,
+                find_first_match=True,
+                ensure_strategy=[AwesomeVersionStrategy.SEMVER],
+            ) > AwesomeVersion(
+                installed_version,
+                find_first_match=True,
+                ensure_strategy=[AwesomeVersionStrategy.SEMVER],
+            )
+
+    update = MockUpdateEntity()
+    update.hass = hass
+    update.platform = MockEntityPlatform(hass)
+
+    STABLE = "20230913-111730/v1.14.0-gcb84623"
+    BETA = "20231107-162609/v1.14.1-rc1-g0617c15"
+
+    # Set current installed version to STABLE
+    update._attr_installed_version = STABLE
+    update._attr_latest_version = BETA
+
+    assert update.installed_version == STABLE
+    assert update.latest_version == BETA
+    assert update.state == STATE_ON
+
+    # Set current installed version to BETA
+    update._attr_installed_version = BETA
+    update._attr_latest_version = STABLE
+
+    assert update.installed_version == BETA
+    assert update.latest_version == STABLE
+    assert update.state == STATE_OFF