Inherited symbionts are ubiquitous in insects and can have important consequences for the fitness of their hosts. Many inherited symbionts defend their hosts against parasites or other natural enemies; however, the means by which most symbionts confer protection is virtually unknown. We examine the mechanisms of defence in a recently discovered case of symbiont-mediated protection, where the bacterial symbiont Spiroplasma defends the fly Drosophila neotestacea from a virulent nematode parasite, Howardula aoronymphium. Using quantitative PCR of Spiroplasma infection intensities and whole transcriptome sequencing, we attempt to distinguish between the following modes of defence: symbiont–parasite competition, host immune priming and the production of toxic factors by Spiroplasma. Our findings do not support a model of exploitative competition between Howardula and Spiroplasma to mediate defence, nor do we find strong support for host immune priming during Spiroplasma infection. Interestingly, we recovered sequence for putative toxins encoded by Spiroplasma, including a novel putative ribosome-inactivating protein, transcripts of which are up-regulated in response to nematode exposure. Protection via the production of toxins may be a widely used and important mechanism in heritable defensive symbioses in insects.