Energetic composites composed of metal and oxidizer are limitedly employed in thermal engineering systems due to their sensitivity. Therefore, energetic polymer encapsulation can be suggested as a method of protecting energetic composites from unexpected external stimuli, as well as maintaining relatively high explosive reactivity. In this study, the effect of nitrocellulose (NC; polymer) encapsulation on the ignition and combustion characteristics of aluminum (Al; fuel)/potassium periodate (KIO4; oxidizer) energetic composites is systematically examined. NC-encapsulated Al/KIO4 energetic composites are manufactured using a spray drying method, which enables uniform mixing of Al nanoparticles (NPs) with KIO4 NPs in the NC matrix. As the more NC encapsulation is made on Al/KIO4 energetic composites, the ignition delay time and ignition threshold spark energy increase, suggesting a reduction in the sensitivity of the energetic composites. However, the maximum pressure and pressurization rates of NC-encapsulated Al/KIO4 energetic composites ignited in a closed cell are higher when the NC content is below 10 wt%, and then they considerably decrease with excessive NC content (>10 wt%). On the basis of propulsion tests, the kinetic energy of bullet-type projectiles and specific impulses of small rocket-type projectiles charged with NC content of 5–10 wt% in the Al/KIO4 energetic composites are two times higher than the values for Al/KIO4 energetic composites with no NC content. These results prove that the optimized polymer encapsulation is highly beneficial for developing various functional energetic composites and composite solid propellants, with compromised sensitivity and explosive reactivity, for enhancing the propulsion of small projectiles.