Isabel Green finds herself overwhelmed by the demands of her daily life as her husband, Rory, goes off to fight in the Second World War. Balancing the responsibilities of maintaining the family farm and working at the local shop run by the eccentric Mrs. Docherty, she also faces the challenge of raising her three spirited children: 12-year-old Norman, 11-year-old Megan 'Megsie', and 6-year-old Vincent.
The situation becomes even more complicated when their affluent and pompous city cousins, Cyril and his 11-year-old sister Celia, arrive from the city due to evacuation. As tensions rise with the ongoing conflict, Isabel's burdens multiply. Enter the enchanting Nanny McPhee, who appears just when her assistance is most needed. Despite her magical abilities, initially, the children resist her help and continue their squabbling. However, Nanny McPhee soon employs her powers to teach them a lesson by making them experience the same harm they inflict on one another, while also endangering important letters from their missing father, Rory. Luckily, once the children sincerely apologize to each other, peace is restored.
Meanwhile, Isabel's brother-in-law Phil finds himself in serious trouble after losing his half of the family farm through gambling. In desperation, he attempts to coerce Isabel into selling her half of the farm, even releasing a litter of piglets to be sold to a neighboring farmer. However, the children band together to thwart Phil's plan, which ultimately helps them develop a stronger bond.
In a moment of camaraderie, Isabel organizes a picnic as a gesture of thanks, during which Mrs. Docherty's husband, who serves as an ARP Warden, warns them of the impending dangers of bombs. The situation takes a dark turn when Phil delivers devastating news: Rory has been killed in action. The news shakes everyone, but Norman, fueled by the belief that he can sense his father's presence, insists that Rory is still alive. He shares this conviction with Cyril, who, after some initial skepticism, starts to believe in Norman's intuition.
Determined to find out the truth, the two boys persuade Nanny McPhee to help them journey to the War Office in London, where Cyril and Celia's father, Lord Gray, holds a high-ranking position. Upon confronting Lord Gray about their father's fate, Norman faces derision for his hopeful disbelief, but Cyril's revelations about their parents' divorced situation prompt Lord Gray to dig deeper into the matter. Meanwhile, Norman opens up to Cyril about where he'd like them to live, inviting him and Celia to join the Green family permanently.
When Lord Gray returns, he confirms that Rory is not dead but rather missing in action, and there’s no official record of the telegram Phil claimed to have sent. Sensing an opportunity, Norman deduces that Phil had forged the message. Back at home, while they are preoccupied with their journey, Megsie, Celia, and Vincent work to prevent Isabel from signing papers that would hand over the farm to Phil. They create diversions, such as feigned mouse sightings and hiding pens. Just as Isabel is about to finalize the sale, an unexpected turn of events occurs—a German pilot accidentally drops a bomb on the Green's barley field. Fortunately, it fails to detonate but leaves a mark of ink that obliterates the papers, saving Isabel from signing away her family's livelihood.
As Nanny McPhee, Norman, and Cyril return, Phil confesses his guilt regarding the forgery and is promptly secured by Isabel. The excitement continues as everyone gathers to witness Mr. Docherty attempting to defuse the bomb; when he faints, Megsie bravely steps up, ultimately succeeding with the assistance of her siblings and Nanny McPhee's magical jackdaw, Mr. Edelweiss.
In a burst of magic, Nanny McPhee aids in the harvest of barley, effectively preventing Phil from falling prey to the relentless pursuers sent by Mrs. Biggles. The film culminates in a joyous celebration, and as Nanny McPhee prepares to take her leave—having fulfilled her purpose—Mrs. Docherty reveals her true identity as baby Agatha from the first installment. Isabel and the children chase after Nanny McPhee, only to witness Rory returning home with a bandaged arm. The family reunites in an emotional embrace, marking a heartwarming conclusion to their harrowing experiences.
In a light-hearted post-credits scene, an elephant conjured by Nanny McPhee, who previously stole the show by sharing Vincent's bed, is seen merrily operating a magical device invented to entertain the piglets.
