Most soil organic matter models focus on carbon (C) dynamics rather than on element interactions. However, in many regions of the world, particularly at high latitudes, soil organic matter decomposition is constrained by low nitrogen (N) availability. This phenomenon is not well understood and usually not mechanistically represented in decomposition models. Here we formulated a process-based model of litter decomposition to investigate N limitation effects on fungus-driven decomposition. Unlike most other decomposition models, our model describes fungal mycelial dynamics explicitly. Fungal biomass is divided into three fractions: (1) cytoplasmic cells active in decomposition, (2) vacuolised cells with a lower N content and without decomposition capacity, and (3) dead cells (necromass). The model can predict mass loss trajectories of litter types with different N content based on site-specific parameters. The fungal mycelium responds to N limitation by increasing the proportion of vacuolised, inactive cells with a low N content, reducing decomposition rates. As a consequence of increased cell inactivation under N limitation, N accumulates in the necromass pool. To predict observed patterns of N immobilisation and release, the rate of fungal necromass decomposition has to be slow and close to that of lignin. Moreover, we found that slow mycelial growth facilitates exploitation of low N resources, whereas fast growth intensifies N-limitation. Our model disentangles the interplay between N availability, mycelial dynamics, and decomposition, pointing towards the potentials of more explicit incorporation of fungal traits in models of N limited ecosystems.