In 1983, 12-year-old schoolboy Shaun gets into a fight at school after a classmate, Harvey, makes an offensive joke about his father, who died in the Falklands War. On his way home, Shaun comes across a group of young skinheads led by Woody, who feels sympathy for Shaun and invites him to join the group, among them Milky who is the only black skinhead in the group, Lol is Woody's girlfriend, Gadget, Smell, Pukey, Kes, Kelly (Lol's younger sister), Trev, and Meggy. They accept Shaun as a member, and he finds a big brother in Woody, while developing a romance with Smell, an older girl who dresses in a new wave style.
Combo, an older skinhead, returns to the group after a prison sentence, accompanied by a knife-wielding mustachioed man called Banjo. A charismatic but unstable individual with sociopathic tendencies, Combo expresses English nationalist and racist views, and attempts to enforce his leadership over the other skinheads. This leads the group to split. Combo is impressed by and identifies with Shaun, who in turn sees Combo as a mentor figure.
Shaun stays in Combo's group instead of the apolitical skinheads led by Woody. Shaun goes with Combo's group to a white nationalist meeting. After Pukey expresses doubt over the group's racist and nationalistic politics, Combo throws him out of the group and sends him back to Woody. The gang then engages in racist antagonism of, among others, shopkeeper Mr. Sandhu, an Indian man who had previously banned Shaun from his shop.
Combo becomes depressed after Lol, whom Combo has loved since having sex with her one night, years before, rejects him. To console himself, Combo buys cannabis from Milky. At a party with Shaun and the other members of Combo's group, Combo and Milky bond while intoxicated. Combo invites Milky to tell him about himself. Milky describes his many relatives and comfortable family life to Combo who listens with increasing jealousy. When Milky invites him to a family dinner, Combo becomes enraged and beats Milky into a coma whilst Banjo holds Shaun down, who watches in horror. Ashamed and devastated by what he has done to Milky, Combo then turns hysterical, violently dragging the others out of the room and glassing Banjo in the face, covering Meggy in blood. Shaun returns, and he and Combo are shown crying and panicking whilst dragging Milky to a nearby hospital.
The film cuts forward to Shaun in his room brooding about the whole event, with his mother Cynthia (Jo Hartley) assuring Shaun that Milky will be alright. Shaun is then shown walking near the beach and throwing his Saint George Flag into the sea.