SUMMARYA new finite element method is developed to simulate time‐dependent viscoelastic shear‐thinning flows characterized by the generalized Oldroyd‐B model. The focus of the algorithm is improved stability through a free‐energy dissipative scheme by using low‐order piecewise‐constant finite element approximations for stress. The algorithm is further modified by incorporating a pressure‐projection method, a DG‐upwinding scheme, a symmetric interior penalty DG method to solve the elliptic pressure‐update equation and a geometric multigrid preconditioner. The improved stability and cost to accuracy is compared when using higher order discontinuous bilinear approximation, where in addition, we consider the influence of a slope limiter for these elements. The algorithm is applied to the 2D start‐up‐driven cavity problem, and the stability of the free energy is illustrated and compared between element choices. An application of the model to modelling blood in small arterioles and channels is considered by simulating pulsatile blood flow through a stenotic arteriole. The individual influences of viscoelasticity and shear‐thinning within the generalized Oldroyd‐B model are investigated by comparing results to the Newtonian, generalized Newtonian and Oldroyd‐B models. Copyright © 2014 John Wiley & Sons, Ltd.