Reducing the flammability of epoxy resins while preserving their transparency or mechanical performance is a constant challenge. Herein, a multifunctional phosphaphenanthrene−silicone−epoxy soybean oil flame retardant (PSOSi) was successfully synthesized. The addition of PSOSi causes polysiloxane nanoparticles to form in situ during the curing process. Notably, an intriguing result is that the presence of polysiloxane nanoparticles, smaller than the wavelength of visible light, minimizes light scattering and enhances the transparency of DGEBA/DDM/PSOSi composites. Additionally, by adding 20% PSOSi to DGEBA/DDM/ PSOSi composites, the tensile modulus increased by 33.3% and the notched impact strength increased by an impressive 108.3%. The limiting oxygen index (LOI) of the DGEBA/DDM/PSOSi-20% composite material has been enhanced to 29.5%, achieving UL-94 V-0 rating. Furthermore, it has been demonstrated to be an effective flame-retardant coating for wood. All of these findings indicate that PSOSi is a versatile and effective flame retardant, enhancing the overall performance of epoxy resins.