SummaryNiche differences among species are considered key drivers of coexistence (limiting similarity), and increased heterogeneity of resources should promote species diversity through niche partitioning (niche theory). Two predictions follow – co‐occurring species should be more different than expected by chance, especially in productive communities due to increased competition, and heterogeneity should increase both species and functional diversity. However, evidence for these predictions in plant communities is limited.We examined niche overlap in functional traits among co‐occurring grassland species in relation to fertility and resource heterogeneity to determine whether species are more different than expected and reveal dominant assembly processes. We conducted a mesocosm experiment with five treatments, with three levels of soil nutrient availability (low, medium, high) and scale of resource heterogeneity (at medium fertility, large‐scale heterogeneous – patch size 156 cm2, small‐scale heterogeneous – patch size 39 cm2).We measured community weighted means and niche overlap for three functional traits related to resource acquisition and competitive ability (specific leaf area, leaf size and plant height), and compared our observed values to those expected when abundance was randomly allocated to species in the experimental treatments.For leaf size and plant height, we found more niche overlap with increased fertility, and a positive relationship between shoot biomass and niche overlap, whereas the opposite pattern was found for specific leaf area. For all traits, the heterogeneity treatments generally had similar niche overlap values as the high‐fertility treatment and differed significantly from the homogeneous treatment of the same overall fertility. Patch type was important in most cases; significant differences were detected in functional composition and niche overlap between the low‐ and high‐fertility patches in the heterogeneity treatments.Increased niche overlap with increased fertility and heterogeneity can be due to both habitat filters restricting the range of trait values and competition – when resources are either homogenously high or high‐fertility patches are available. The small‐scale distribution of soil resources impacts on community assembly processes and should be incorporated into future studies examining functional diversity, especially when the aim is to determine the influence of productivity gradients.