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Direct nitrogen (N) losses from pastures contribute to the poor nitrogen use efficiency of the dairy industry, though the exact fate of applied N and the processes involved are largely unknown. Nitrification inhibitors such as DMPP can potentially increase fertilizer N use efficiency (NUE), though few studies globally have examined the effectiveness of DMPP coated urea in pastures. This study quantified the NUE of DMPP combined with reduced application rates, and the effect on N dynamics and plant–soil interactions over an annual ryegrass/kikuyu rotation in Queensland, Australia. Labeled 15N urea and DMPP was applied over 7 winter applications at standard farmer (45 kg N ha−1) and half (23 kg N ha−1) rates. Fertilizer recoveries and NUE were calculated over 13 harvests, and the contribution of fertilizer and soil N estimated. Up to 85% of the annual N harvested was from soil organic matter. DMPP at the lower rate increased annual yields by 31% compared to the equivalent urea treatment with no difference to the high N rates. Almost 40% of the N added at the conventional fertilizer application rate as urea was lost to the environment; 80 kg N ha−1 higher than the low DMPP. Combining the nitrification inhibitor DMPP with reduced fertilizer application rates shows substantial potential to reduce N losses to the environment while sustaining productivity in subtropical dairy pastures.