Peatlands are important reservoirs of carbon (C) but our understanding of C cycling on cutover peatlands is limited. We investigated the decomposition over 18 months of five types of plant litter (Calluna vulgaris, Eriophorum angustifolium, Eriophorum vaginatum, Picea sitchensis and Sphagnum auriculatum) at a cutover peatland in Scotland, at three water tables. We measured changes in C, nitrogen (N) and phosphorus (P) in the litter and used denaturing gradient gel electrophoresis to investigate changes in fungal community composition. The C content of S. auriculatum litter did not change throughout the incubation period whereas vascular plant litters lost 30–40% of their initial C. There were no differences in C losses between low and medium water tables, but losses were always significantly less at the high water table. Most litters accumulated N and E. angustifolium accumulated significant quantities of P. C, N and P were significant explanatory variables in determining changes in fungal community composition but explained <25% of the variation. Litter type was always a stronger factor than water table in determining either fungal community composition or turnover of C, N and P in litter. The results have implications for the ways restoration programmes and global climate change may impact upon nutrient cycling in cutover peatlands.