Widower Cedric Brown (Colin Firth) has seven children: Simon (Thomas Sangster), Tora (Eliza Bennett), Lily (Jennifer Rae Daykin), Eric (Raphaël Coleman), Sebastian (Samuel Honywood), Chrissy (Holly Gibbs), and baby Aggie (Hebe and Zinnia Barnes), all of whom he loves dearly, but spends little time with. The children have had a series of seventeen nannies, whom they drive out. They also terrorize the cook, Mrs. Blatherwick (Imelda Staunton) but are cared for and loved by Evangeline (Kelly Macdonald) the young scullery maid.

Cedric attempts to hire another nanny from the agency that sent the past seventeen nannies, but the agency refuses him, as the children have sent the past nannies away, terrorized. Desperate to find another nanny, Cedric heeds the advice of a mysterious voice from the house, which says, "the person you need is Nanny McPhee." After a series of mysterious events, an unusual and hideous woman named Nanny McPhee (Emma Thompson) arrives at Brown home, introducing herself as a "government nanny." She finds the children destroying the kitchen, and when they refuse to go to bed, she taps her magic staff, causing the children to uncontrollably demolish the kitchen. When Simon finally says "please Nanny McPhee", she magically clears up the mess and sends them up to bed. In similar fashions, with discipline and magic, she transforms the family's lives. In the process, she gradually becomes less hideous.

The children have an elderly Great-Aunt, Lady Adelaide Stitch (Angela Lansbury). Though she believes that she is acting in concern for the well-being of her family, Aunt Adelaide is the source of major conflicts in the Browns' lives. In conjunction with her support for the family, Adelaide demands custody over one of the children in order to ensure their continued education and proper upbringing. Evangeline volunteers to go in the place of one of the children and Adelaide agrees, assuming that she is one of Cedric's daughters.

Cedric decides to propose to a woman named Selma Quickly (Celia Imrie). Based on the image of stepmothers in fairy tales, the children assume that stepmothers are all cruel, and attempt to sabotage a visit from Mrs. Quickly. Mr. Brown's endeavors to protect Mrs. Quickly from his children's pranks result in him throwing himself on top of her, pulling her to the floor and burying his face in her cleavage. Nevertheless, Mrs. Quickly - ignorant of the children's pranks - is happy with all this provided that she gets a proposal. However, when his proposal is ruined by more pranks, she leaves and refuses to see him again. The children are thrilled that Mrs. Quickly is gone. However, Cedric reveals that his wages as an undertaker are insufficient to financially support his children and reveals that Aunt Adelaide had been financially supporting the Brown family for years with a monthly allowance, and that she would cut off the allowance if he did not remarry by the end of the month. If that happens, then Cedric will be thrown into debtors's prison and the children will be sent into the workhouse or adopted, due to them being thrown out due to being unable to pay the rent. Realising the only option, they confess to Mrs. Quickly that they were to blame for the disturbance of her visit, and lure her with promises of Aunt Adelaide's wealth.

On the day of the wedding, the children discover that Mrs. Quickly is as conniving and cruel as they had feared when she breaks Aggie's rattle - a memento of their late mother. Evangeline returns as well, seemingly turned into a stoic and proper lady by Aunt Adelaide. When everyone is gathered for the wedding, Simon despairs that there is nothing more they can do to stop this marriage. Nanny McPhee advises Simon the best thing is to do "exactly as you are told." Aggie begins repeating the word "beehive" (imitating Mrs. Quickly, as earlier she strictly told them to "behave") to Simon, who realizes the baby is telling him what to do. He and the other children disrupt the ceremony by pretending a swarm of bees has been attracted to Quickly's flowered hat. Cedric realizes that both he and his children truly dislike his wife-to-be, and joins in the disruption of the ceremony. Mrs. Quickly asks Cedric point blank if he can actually see any bees, and he says that yes, he can, then swats an imaginary bee from her hat so forcefully that she falls to the ground. Things soon lead to a riotous food fight, with Evangeline joining in. Angered, Mrs. Quickly puts an end to the wedding and storms off.

Just as it seems that Adelaide's marriage deadline has passed without result, Simon realizes that his father could still marry Evangeline, to whom he has demonstrated something of an attraction, and the other way around. Although both Cedric and Evangeline attempt to deny it, due to the inevitable breaking of class boundaries such a marriage would cause, they finally admit their love for each other.

Nanny McPhee taps her magic staff one last time, and provides a perfect backdrop for Cedric's marriage to Evangeline by creating a snowfall, covering over the ruined mess of the former ceremony. She also transforms Evangeline's dress into a wedding gown and Aggie's rattle is magically restored.

Now that the children have learned all of Nanny McPhee's lessons, she has been transformed into a beautiful woman. As the wedding ceremony commences, Nanny McPhee is seen leaving in the final frames, with her voiceover reiterating her earlier declaration that "When you need me, but do not want me, then I must stay. When you want me, but no longer need me, then I have to go."