Herein, the composite powder with a core–shell heterostructure (Fe–Si–Cr magnetic particles as the core and ZnSO4 as the shell) was synthesized using hydrothermal method, and Fe–Si–Cr-based soft magnetic composites (SMCs) with an insulation layer of ZnO·SiO2·Cr2O3 (ZSC) composites were successfully prepared via powder heat treatment and cold pressing. The formation mechanism of the ZSC composite insulation layer was thoroughly investigated, and the impact of varying amounts of ZnSO4 on the Fe-Si-Cr/ZSC SMCs’ microstructure and magnetic properties was analyzed. ZnSO4 released oxygen during thermal decomposition and oxidation reaction occurred at the core–shell heterogeneous interface, forming ZSC composite insulation layer. The incorporation of ZnSO4 significantly influenced the homogeneity and thickness of the composite insulation layer, effectively modulating the magnetic properties of Fe–Si–Cr/ZSC SMCs. This SMCs had the best magnetic properties after the addition of 2 wt% ZnSO4. Under 10 mT and 300 kHz, the relative permeability was 37.7, with a total loss of 248.8 kW/m3 The method proposed in this study is beneficial for facilitating the advancement of SMCs towards high frequency and further optimizing its performance.