Encapsulating materials for light‐emitting diodes (LEDs) with optical‐grade polymeric resin is essential to protect from external environments and to improve light‐extraction efficiency (LEE) in micro‐scale LED (µ‐LED). In addition, the formation of microlens can further enhance the optical performance of µ‐LED. However, previously developed materials have limitations due to a lack of rheological properties and thermal stability. Here, the fabrication of sol–gel derived phenyl siloxane hybrid (PSH) that has a high refractive index (n), for use as an encapsulating material for µ‐LEDs is reported. Fumed silica nanoparticles (FSNs) are mixed with the PSH to yield siloxane/silica nanocomposites that have thixotropic properties, which enable the formation of microlens arrays. Optimizing the concentration of FSN in the nanocomposites yields a siloxane/silica nanocomposite that has a high n = 1.590 at 486 nm, high thixotropic index = 3.956, and increased optical haze (79.83% at 550 nm) makes light scattering. The use of PSH significantly increases the LEE of the LED (124.6% increase compared to an LED that does not use it). Finally, the siloxane/silica nanocomposite is used to direct‐dispense microlenses on µ‐LEDs in arrays. The encapsulation strategy can increase both the LEE and reliability of µ‐LEDs.