In a bid to increase the number of people receiving treatment for the condition, doctors are to be given a £55 incentive for each patient they diagnose with dementia.
Currently, less than half of the 800,000 people in the UK with the condition have received a formal diagnosis and so many are not receiving the help they need.
NHS England has a target to diagnose two-third of patients with dementia by 2015 and it is hoped the £5 million fund will help practices to reach this goal.
When patients are diagnosed, there will be further incentives for delivering care to those living with dementia.
GP practices will have to have a detailed plan to show how they are improving the rate of diagnosis. They may also have to improve the way cases are recorded, to ensure accurate records are kept.
Measures may also include GPs visiting care homes to assess elderly patients who may not have received a dementia diagnosis to see if they do indeed require one.
National director for long term conditions at NHS England Dr Martin McShane explained the funding is aimed at helping to provide better care.
"We know that more needs to be done across the health service to ensure that people living with dementia are identified so that they can get the tailored care and support they need."
He said that the investment is just one part of "a larger range of measures" that have been introduced to help GPs in their work tackling the condition.
The Alzheimer's Society has offered its encouragement to the scheme, stating that those who are concerned about their memory and their carers deserve to benefit from support given to GPs to help tackle the issue.
By 2015, it is predicted around 850,000 people in the UK will be living with dementia.
Although it mainly affects people over the age of 65 (approximately one in 14 over-65s have the condition), there are over 40,000 under-65 who have dementia.
Read more about Barchester's dementia care homes.