In July 1983, Shaun is a troubled 12-year-old boy who lives with his widowed mother and is frequently antagonised in school and around town. On the last day of the school year, Shaun gets into a fight at school with a boy named Harvey after the latter makes an offensive joke about his father, who was killed in the Falklands War. On his way home, Shaun comes across a gang of young skinheads led by Woody, who feels sympathy for Shaun and invites him to join the group. He introduces Shaun to Milky, the only black skinhead of the gang; Pukey, Kes, and the overweight, dim-witted Gadget. Despite some initial hostilities between Shaun and Gadget, the gang accepts Shaun as a member. Shaun bonds closely with Woody, viewing him a big brother figure, and his girlfriend Lol, who takes a motherly role towards him. Shaun also develops a romantic relationship with Michelle, also known as Smell, an older girl who dresses in a new wave, new romantic style.
During a party one night, the group is ambushed by a bald, tattooed, moustachioed machete-wielding man, who is then attacked by Combo, a first-wave skinhead. With the attack revealed to be a prank, Woody announces that Combo had just finished a three-year prison sentence, and Combo introduces the man as his associate Banjo. Combo, a charismatic but unstable man with sociopathic tendencies, begins to express English nationalist and racist views, alienating Woody, Lol, Kes, and Milky. Later on, he attempts to enforce his leadership over the other skinheads. When Combo mentions the Falklands War as part of a white genocide conspiracy theory, an upset Shaun reveals to the gang that his father died in that conflict, which Combo then uses to manipulate the boy into joining his side. Consequently, the gang splits, with young Shaun, the belligerent Pukey, and Gadget, who feels bullied by Woody for his weight, choosing Combo over Woody’s apolitical gang.
Shaun finds a hero-figure in Combo, who in turn is impressed by, and identifies with, Shaun. Combo’s group attend a National Front meeting. On the drive home Pukey expresses doubt over their racist and nationalistic politics. Combo furiously stops the car and yanks Pukey out, lightly assaulting him in ridicule in front of the others, abandoning him in isolated countryside by the roadside.
The gang deface walls, intimidate local children and spray racist slogans on Pakistani Mr Sandhu’s shop walls, whilst Shaun, previously banned from the shop, launches a bigoted verbal assault on Sandhu with demands for drink and cigarettes. Combo visciously threatens Sandhu with a machete and the gang steal goods for a birthday party under Combo’s instructions.
Combo becomes upset after Lol, Woody’s girlfriend, rejects him when he admits that he has loved her since they had sex years before. To console himself, Combo buys cannabis from Milky, and invites him to a party. While intoxicated, Combo and Milky bond, but Combo becomes increasingly bitter and envious, all wrapped up in a racist viewpoint, when Milky shares details of his many relatives, comfortable family life and happy upbringing, everything that Combo lacked. Enraged, Combo enters a frenzied state and brutally beats Milky unconscious, while Banjo holds down Shaun, and Meggy watches on in horror. An angry Combo violently throws Shaun out of his flat after Shaun verbally defends Milky, then slams the door hard. When Banjo attempts to hit Milky as well, Combo violently beats him and evicts him and Meggy from the flat. Horrified at the realisation of what he has done, a remorseful Combo weeps over Milky. Shaun and Combo later take Milky to a nearby hospital.
The film cuts forward to Shaun, who is in his bedroom looking at a picture of his late father. He is contemplating the incident and brooding about what happened, with his mother Cynthia assuring him that Milky will be all right. Shaun is then shown walking near the beach and throwing his St George’s Flag, a gift from Combo, into the sea.