Soil organic carbon is essential to improve soil fertility and ecosystem functioning. Soil microorganisms contribute significantly to the carbon transformation and immobilisation processes. However, microorganisms are sensitive to environmental stresses such as heavy metals. Applying amendments, such as biochar, to contaminated soils can alleviate the metal toxicity and add carbon inputs. In this study, Cd and Pb spiked soils treated with macadamia nutshell biochar (5% w/w) were monitored during a 49 days incubation period. Microbial phospholipid fatty acids (PLFAs) were extracted and analysed as biomarkers in order to identify the microbial community composition. Soil properties, metal bioavailability, microbial respiration, and microbial biomass carbon were measured after the incubation period. Microbial carbon use efficiency (CUE) was calculated from the ratio of carbon incorporated into microbial biomass to the carbon mineralised. Total PLFA concentration decreased to a greater extent in metal contaminated soils than uncontaminated soils. Microbial CUE also decreased due to metal toxicity. However, biochar addition alleviated the metal toxicity, and increased total PLFA concentration. Both microbial respiration and biomass carbon increased due to biochar application, and CUE was significantly (p < 0.01) higher in biochar treated soils than untreated soils. Heavy metals reduced the microbial carbon sequestration in contaminated soils by negatively influencing the CUE. The improvement of CUE through biochar addition in the contaminated soils could be attributed to the decrease in metal bioavailability, thereby mitigating the biotoxicity to soil microorganisms.