Northamptonshire County Council had been handed £4m from the Department for Education's children's social care innovation programme to help launch an independent trust to run children's services.
A limited company, called Children's First Northamptonshire, has been set up to develop the new organisation ahead of a planned launch in April 2019.
However, councillors have put the plans on hold due to uncertainty around the future of the council.
A council report on Children's First Northamptonshire states: "Given the uncertainty of the future governance arrangements across Northamptonshire and possibility of there being two new unitary authorities it would be premature to continue with the development of an ADM (alternative delivery model) for the delivery of Children First Northamptonshire services at this time."
The report adds that if plans to split the council are approved the "viability of the ADM model" would be impacted if one of the new authorities wanted to commission Children First Northamptonshire and the other wished to keep children's services in house.
A separate report by PricewaterhouseCoopers on the reorganisation plans, being presented to councillors later this month, adds: "Children's First Northamptonshire, currently a limited company, exists for putting children's services into an arm's-length vehicle.
"However, the original intention to use it as a vehicle for provision on an outsourced basis are on hold."
The decision comes as the council faces deep cuts in spending in an effort to make up to £70m worth of savings in 2018/19.
The splitting of the council into two separate authorities has been recommended by government. In addition Northamptonshire is subject to a "Section 114 notice" banning it from any new spending, except on safeguarding vulnerable children and adults.
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Unison Northamptonshire branch secretary Penny Smith, said the decision to put outsourcing on hold was inevitable given the uncertainty about the council's future.
"We know that whatever is decided the current system will not remain. Therefore you can't outsource something that is going to be split in half," she said.
She added that outsourcing is unpopular among staff.
"In the public domain jobs are more secure and terms and conditions can be managed more effectively. People who work in the public sector want it to be public, they don't want to be delivering public services in a private organisation," she said.
"For the children concerned it is also much better to be part of the public sector as otherwise you are adding another layer of responsibility."
Northamptonshire County Council first announced plans to establish an independent trust to run children's servces in 2015 with a planned launch date to September 2016.
But the project has been subject to delays as the council's financial plight worsened.
Despite uncertainty about its future the council insisted in April that outsourcing was still being pursued, with the cabinet approving the creation of a shadow version of the new organisation.
The council's children's services, which were rated as "requires improvement" in their last Ofsted inspection in April 2016, were rebranded as Children First Northamptonshire earlier this year.
The £4m in innovation grant money was also handed to the council to help improve children's services and set up a charity for children in care and care leavers, as well as develop the outsourcing plan.
A council report states: "The transformation of children's services and the charity remain on track and will be delivered."