Nanny McPhee (Emma Thompson) teaches the children (and Isabel (Maggie Gyllenhaal)) five lessons:
1) To stop fighting;
2) To share;
3) To help each other;
4) to be brave;
5) to have faith.
As in the first film, she gets less and less ugly as the children become better behaved.
The family receives a telegram that says that their father was killed in action, but Norman doesn't believe it. With help from Nanny McPhee, Norman and Cyril travel to London to find out the truth from Cyril's father who has a high office in the military. It turns out that Norman's father is only missing in action, and they figure out that the telegram must have been forged by Uncle Phil (Rhys Ifans). They go as fast as they can back to the farm.
Meanwhile, Isabel prepares to sign Uncle Phil's paperwork to sell the farm. The girls try to stall her as long as they can, but they cannot stop her. Mother is halfway through signing her name when a bomb is dropped right is the middle of their barley field! It does not explode, however, and needs to be disarmed.
Then Nanny McPhee and the boys arrive and tell the news about Father and Uncle Phil. Uncle Phil admits that he forged the telegram, and asked to be arrested so that he'll be safe from the henchwomen who have come to collect for his gambling debt. They leave him handcuffed in the house.
After Mr. Docherty faints, it's up to the children to disarm the bomb. With the help of Mr. Edelweiss (the little crow), who eats some of the putty so Megsie can cut a wire, they manage to disarm the bomb. Then Nanny McPhee uses her magic to cause a strong wind to blow, that reaps the barley harvest, and blows away the henchwomen who have caught up with Uncle Phil.
Nanny McPhee then starts walking away knowing that they want her, but don't need her anymore. But Isabel and the children run after her to try to get her back. As they turn a corner they see Father, who is alive and back from the war! It's a joyful reunion. Nanny McPhee leaves with Mr. Edelweiss, knowing her work is complete.
(At the end we also learn that Isabel's elderly employer, Mrs. Docherty (Maggie Smith), is Aggie, the baby from the first Nanny McPhee film.)