Alternative solutions to chemical fertilizers that can enhance soil fertility, increase crop yield, promote sustainable agriculture and reduce harmful environmental impacts are urgently required. Microalgal bio-inoculants can improve soil fertility, plant growth and crop yield, yet the response of native soil microbiome to microalgal application remains largely unexplored. A pot experiment was conducted to assess the effects of microalgae (a consortium of cyanobacteria and green microalgae) inoculation on the growth and yield of chili plants, soil fertility and soil microbiome. Our results showed that microalgal inoculation significantly enhanced plant morphometric parameters and increased dehydrogenase activity (p < 0.05). Similarly, soil organic carbon, soil chlorophyll, total polysaccharides and nutrients such as carbon, nitrogen, phosphorus, potassium and manganese were also significantly (p < 0.05) enriched in microalgal treatment groups (50% and 100%) compared to the control. Results showed that microalgal inoculation increased the soil microbial diversity, with the richness being higher in treated soils than in control. Metagenomics analysis revealed a shift in bacterial and fungal community composition with firmicutes, chloroflexi, planctomycetes, proteobacteria, bacillariophyta, basidiomycota and glomeromycota dominating microalgal-treated soils, while actinobacteria, bacteroidetes, and streptomycota dominating control soils. The findings suggested that microalgal bio-inoculation can increase the diversity and composition of native soil microbiomes and enhance soil fertility, growth, and yield in chili plants.