The opposition foreign affairs spokesman was expected to quit at the next federal election, due to be held by May, sources told AAP.
Senator Birmingham entered parliament in 2007 and has served as trade, finance and education ministers in coalition governments under Malcolm Turnbull and Scott Morrison.
The leader of Liberal moderates faction is respected across the parliament, and with 17 years of experience is seen as a loss to the party.
Before his official announcement on Thursday, Opposition Leader Peter Dutton thanked Senator Birmingham at the end of Question Time.
"Birmo has a young family and I know he's going to look forward to spending more time with them, and he's given an enormous amount to our country," he said.
Prime Minister Anthony Albanese said the Liberal senator had "very broad respect right across the parliament, and he certainly has my personal respect".
"He's someone who is someone of integrity, who is easy to deal with and to get things done.
"So to Simon and Courtney and their family, it is understandable that he's made this decision, but I wish him all the very best," he said.
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