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Summary: The production of functional foods has been on a consistent rise in the past few years. The increasing demand for these foods could play a pivotal role in addressing the escalating issue of food waste and in the creation of innovative food formulations. Utilising by‐products from the food industry has become commonplace due to their advantageous nutritional composition and functional properties. These by‐products retain richness in colour compounds, proteins, amino acids, lipids, fatty acids, sugars, fibres, minerals, vitamins, antioxidants and antimicrobial compounds. This abundance of elements can be harnessed to develop innovative food products. This review examines the potential of utilising food industry wastes for producing functional foods, focusing on residues from animal and vegetable origins; such residues find application in creating snacks, beverages, fermented foods, bakery items, dairy products, pasta, charcuterie, chocolate, flavouring agents, additives and culinary innovations. This study seeks to establish a sustainable strategy for minimising food waste disposal, fostering a bio‐based food production industry and enhancing overall sustainability by uncovering alternatives for novel, nutritious and value‐added food products. [ABSTRACT FROM AUTHOR]