Background Adolescent insomnia can be treated effectively with cognitive behavioural therapy for insomnia (CBTI). However, little is known about effects of CBTI on psychopathology in adolescents. This study aimed to investigate whether (a) CBTI improves psychopathology in Internet‐ (IT) and face‐to‐face group treatment (GT) compared to waitlist (WL), (b) improvement in psychopathology can be attributed to reduced insomnia, (c) improvement in psychopathology remains stable for up to 1 year. Methods One hundred and sixteen participants (age = 15.6 years, 25% males) with DSM‐5 insomnia, were randomly assigned to IT, GT or WL. Clinical trial registration: http://www.controlledtrials.com (ISRCTN33922163). Assessments of psychopathology, insomnia and objectively and subjectively measured sleep occurred at baseline, post‐treatment, and at 2‐, 6‐ and 12‐month follow‐up. Multilevel and mediation analyses were run to test hypotheses. The CBTI protocol, ‘Sleeping Smart’ for both IT and GT consisted of six weekly sessions and a booster session after 2 months. Results Psychopathology symptoms, insomnia and sleep problems as measured by actigraphy and sleep logs decreased substantially in IT and GT compared with WL at 2‐month follow‐up with medium to large effect sizes (ESs). Psychopathology symptoms remained stable or further improved for up to 12‐month follow‐up. ESs at 12‐month follow‐up for IT and GT were respectively: affective (d = −0.87 and −0.97), anxiety (d = −0.81 for IT), somatic (d = −0.38 and d = −0.52), oppositional (d = −0.42 for GT) and attention deficit hyperactivity disorder (ADHD) problems (d = −0.47 and −0.46). Mediation analyses indicated that reduction of insomnia symptoms after CBTI fully mediated the effects of CBTI on affective and anxiety problems, and partially mediated the effect on ADHD problems. Conclusions This is the first study demonstrating that Internet and face‐to‐face CBT for insomnia achieves long‐term reduction in adolescent psychopathology and does so by improving insomnia. This finding can have profound implications for youth mental health care.