Sepsis-associated encephalopathy (SAE) is one of the most common types of organ dysfunction without overt central nervous system (CNS) infection. It is associated with higher mortality, low quality of life, and long-term neurological sequelae, its mortality in patients diagnosed with sepsis, progressing to SAE, is 9% to 76%. The pathophysiology of SAE is still unknown, but its mechanisms are well elaborated, including oxidative stress, increased cytokines and proinflammatory factors levels, disturbances in the cerebral circulation, changes in blood–brain barrier permeability, injury to the brain’s vascular endothelium, altered levels of neurotransmitters, changes in amino acid levels, dysfunction of cerebral microvascular cells, mitochondria dysfunction, activation of microglia and astrocytes, and neuronal death. The diagnosis of SAE involves excluding direct CNS infection or other types of encephalopathies, which might hinder its early detection and appropriate implementation of management protocols, especially in paediatric patients where only a few cases have been reported in the literature. The most commonly applied diagnostic tools include electroencephalography, neurological imaging, and biomarker detection. SAE treatment mainly focuses on managing underlying conditions and using antibiotics and supportive therapy. In contrast, sedative medication is used judiciously to treat those showing features such as agitation. The most widely used medication is dexmedetomidine which is neuroprotective by inhibiting neuronal apoptosis and reducing a sepsis-associated inflammatory response, resulting in improved short-term mortality and shorter time on a ventilator. Other agents, such as dexamethasone, melatonin, and magnesium, are also being explored in vivo and ex vivo with encouraging results. Managing modifiable factors associated with SAE is crucial in improving generalised neurological outcomes. From those mentioned above, there are still only a few experimentation models of paediatric SAE and its treatment strategies. Extrapolation of adult SAE models is challenging because of the evolving brain and technical complexity of the model being investigated. Here, we reviewed the current understanding of paediatric SAE, its pathophysiological mechanisms, diagnostic methods, therapeutic interventions, and potential emerging neuroprotective agents.