Dorset County Council is to use the money to recruit 20 additional social workers, who will help reduce caseloads, support families in crisis as well as prevent re-referrals.
The local authority hopes that the investment will deliver £1.5m of savings in 2018/19, based on a predicted reduction in the looked-after children population from 440 to 390.
It is hoped that the number of children in care could be reduced even further, to 346 in 2019/20, generating further savings of £1.32m.
In documents presented to the council's cabinet, which has rubberstamped the proposals, it is estimated that the additional social workers will allow caseloads to be reduced to around 15 per social worker.
"It's right that we're investing additional money into recruiting more children's social workers," Steve Butler, lead member for children's services at Dorset County Council said.
"If we want to reduce the number of children going into care, we need to give our staff more time to work closely with families so they can really make a difference.
"The more social workers we have, the more manageable our caseloads will become, meaning there's more time to change children's lives for the better."
In May last year Dorset Council was handed a rating of "requires improvement" by Ofsted inspectors, who were concerned that referrals were not being dealt with quickly enough.
According to latest Department for Education children's social workforce data, Dorset's children's social worker vacancy rate was 20.5 per cent in 2016, 3.8 per cent higher than the England average. Dorset's use of agency staff was 22.1 per cent, compared with an England average of 16.1 per cent.
In January last year Dorset Council was awarded £2m through the DfE Innovation Fund to develop a children's social work training and development programme called Reinvigorating Social Work.