Changes to climate are projected over the next 50 years for many peatland areas. As decomposition of peat-forming vegetation is likely to be intrinsically linked to these changes in climate, a clear understanding of climate-peat dynamics is required. There is concern that increased temperature and decreased precipitation could increase the rate of decomposition and put the carbon sink status of many peatlands at risk, yet few studies have examined the impact of both climatic factors together. To better understand the sensitivity of peatland decomposition to changes in both temperature and precipitation and their interaction, we conducted a short-term laboratory experiment in which plant litters and peat soil were incubated, in isolation, in a factorial design. Treatments simulated baseline and projected climate averages derived from the latest UK climate change projections (UKCP09) for Exmoor, a climatically marginal peatland in SW England. Regular carbon dioxide flux measurements were made throughout the simulation, as well as total mass loss and total dissolved organic carbon (DOC) leached. The largest effect on carbon loss in this multifactor experiment was from substrate, with Sphagnum/peat releasing significantly less C in total during the experiment than dwarf shrubs/graminoids. Climate effects were substrate specific, with the drier rainfall treatment increasing the DOC leaching from Calluna, but decreasing it from Sphagnum. Partitioning between CO2 and DOC was also affected by climate, but only for the peat and Sphagnum samples, where the future climate scenarios (warmer and drier) resulted in a greater proportion of C lost in gaseous form. These results suggest that indirect effects of climate through changes in species composition in peatlands could ultimately turn out to be more important for litter decomposition than direct effects of climate change from increased temperatures and decreased rainfall.