More than half of schools given extra funding to raise achievement for disadvantaged pupils say it has made "little or no difference" to the way they work.
Just one in ten schools said the pupil premium had significantly changed the way they supported children from disadvantaged backgrounds, a report by Ofsted said.
Schools in England currently receive £600 a year for every disadvantaged pupil, including those on free school meals, looked after children and those from families with parents in the armed forces. To date, a total of £1.5 billion of Pupil Premium funding has been allocated to schools since its introduction in 2011.
But a survey of nearly 262 schools by the regulator found that the extra money was often absorbed into existing school budgets rather than being used to fund new initiatives to help disadvantaged children.
Over two fifths of schools said they used the pupil premium to pay for existing or new teaching assistants, and over a quarter said they used it to fund existing or new teachers.
Around a third of schools said they had used the funding for extra curriculum activities, while one in six said they had used it to subsidise or pay for uniforms or equipment.
As of this month, all schools are required to publish information online on how they have spent pupil premium funds.
A spokesman for Department for Education said: "It's unacceptable that children from disadvantaged backgrounds are less likely to do well in school than their peers.
"We have given schools the freedom to use the additional funding in innovative ways.
"However, it is vital they use it to boost results for the most disadvantaged pupils."
Chris Keates, General Secretary of the teaching union NASUWT, said: "This Ofsted report on the impact of the pupil premium says nothing that the NASUWT did not predict at the time the pupil premium was introduced.
"The pupil premium was never, despite claims to the contrary by ministers, ‘new’ money for schools.
"The fact that it was introduced at a time of savage cuts to the education budget and it was left to the discretion of schools on how to spend it has resulted in the premium being simply swallowed up in schools' budgets.
"As the cuts are set to continue, any benefit there might have been as a result of the introduction of the pupil premium will be eroded away.
"If the pupil premium is to have any widespread positive impact on the children and young people for which it was introduced, it will need to be additional to school budgets and ring-fenced, with close scrutiny of how it is spent."