Propylene oxide (PO) was used to block polycarboxyethyl phenyl ethylene phosphinate (PCEPEP) synthesized by 2‐carboxyethylphenylphosphinic acid (CEPPA) and ethylene glycol (EG) to obtain a reactive phosphonate polyol. The results of chemical titration analysis and Fourier transform infrared spectrum (FT‐IR) showed that the end‐capping effect was best when the molar ratio of PO to acidic functional groups in PCEPEP was 6:1. Moreover, the obtained phosphorus‐containing polyol was used as a reactive monomer to be introduced into thermoplastic polyurethane (TPU) to prepare flame retardant TPU. Cone calorimetry results demonstrated that TPU containing 20 wt% phosphorus‐containing polyol showed a reduction of 3.8%, 72.2%, and 39.3% in the peak heat release rate, total heat release and total smoke release, and an increment of 351.9% in mass retention. The addition of phosphonate polyol enhanced the char‐forming performance of TPU, which effectively prevented the transfer of combustible gas and heat, and displayed a good flame retardant effect.