Climate change is triggering rapid shifts in plant communities and alterations in soil abiotic conditions in peatlands, with cascading effects on belowground decomposers and ecosystem C turnover. However, elucidating the dominant causal relationships between plant communities, soil biota and C fluxes in these vulnerable ecosystems requires a better understanding of the spatio-temporal variability of abiotic and biotic drivers. In this study we investigated the effects of biotic (plant functional types, PFTs) and abiotic factors (soil temperature and soil moisture) in determining dynamic patterns of soil microbial community structure and C cycling. Four representative temperate peatland habitats were selected based on their peat forming vegetation – an Atlantic wet heathland, two active blanket bogs with herbaceous plants (Molinia caerulea and Eriophorum angustifolium), and a transition mire dominated by Sphagnum mosses located along an altitudinal gradient to include the natural variations in soil temperature and water content regimes. We found that peat microbial communities were more strongly linked to local abiotic conditions than to the dominant above-ground vegetation. Aerobic conditions and warmer temperatures accelerated fungal driven decomposition and CO2 emissions under shrubs, whereas decreases in Gram−negative bacteria promoted increased C losses under Molinia. These findings suggest that small spatial differences in abiotic conditions can create local “hotspots” of organic matter decomposition. We propose that temperate peatlands should be considered as ‘ecosystem sentinels’ for climate change, acting as early-warning indicators of climate-carbon feedbacks. •Peat microbial communities were more strongly linked to microclimatic conditions than to vegetation.•More aerobic and warmer soils under shrubs accelerated fungal driven decomposition and CO2 emissions.•Decreases in Gram-negative bacteria under grasses promoted C losses as DOC.•In the absence of abiotic stress, more C was retained (i.e. under mosses and sedges).•We propose temperate peatlands as ‘ecosystem sentinels’ for climate-mediated impacts on the C cycle.