Nursery and primary school children ought to be free to try "the many cloaks of identity" without being labelled or bullied, its 4,700 schools have been advised.
New guidance for head teachers says: "Pupils need to be able to play with the many cloaks of identity (sometimes quite literally with the dressing up box).
"Children should be at liberty to explore the possibilities of who they might be without judgement or derision."
The statement featured in an anti-bullying document, newly-revised to include transphobia and biphobia - in addition to homophobic bullying.
In a foreword to the advice, the Archbishop of Canterbury warned bullying causes "profound damage" and is linked to mental health issues.
Most Rev Justin Welby added: "This guidance helps schools to offer the Christian message of love, joy and the celebration of dour humanity without exception or exclusion."
Stonewall, an organisation which campaigns for gay, lesbian, bisexual and transgender equality in Britain, welcomed the new guidance.
A spokesperson said: "Our research shows that nearly half of lesbian, gay, bi and trans pupils are bullied for being LGBT at school: a situation that desperately needs to change.
"We would like to congratulate the Church for sending a clear signal that homophobic, biphobic and transphobic bullying must never be tolerated."
The Church of England guidance also says: "Children should be afforded freedom from the expectation of permanence.
"They are in a 'trying on' stage of life, and not yet adult and so no labels need to be fixed.
"It may be best to avoid labels and assumptions which deem children's behaviour irregular, abnormal or problematic just because it does not conform to gender stereotypes or today's play preferences."