Its Christmas time and after years of living under the floorboards, the Clock family are discovered after their daughter, Arrietty, befriends a young 'human bean' boy, James. After a night playing together, James's grandmother becomes suspicious of her grandson and begins to spy on him, particularly after she starts to see him acting in mysterious ways.
Finally, the Grandmother begins to tear up the floorboards and discovers her missing things, notably the artifacts from her dollhouse. Upon this, the Clock family flee the ongoing rage of the Grandmother. As a result, the Clock family escape to the sewers, where Pod berates his daughter for having 'spoken to, let alone been seen by a human bean'. The Clock family travel down the sewers and emerge in a city of other little people like themselves, much to Arrietty's dismay, as she had been brought to believe that their family was the only one of their kind.
Meanwhile, Professor Mildeye, a professor at a London university, is specialising in the subject of Homo sapiens redactus (i.e. little people) but is dismissed by his colleagues as a fantasist. He befriends James's grandmother when she begins to ask him questions about little people, having found out about him online.
After a while, the Clock family start to explore their new world. Arrietty, with a new urban fashion sense, is nearly run over by Spiller, a biker-type leader. After a confrontation with her, Homily Clock turns up and makes him apologise, much to Arrietty's annoyance. When it turns out that Arrietty's father has chosen him to guide them to a new place to live, they strike up a friendship of sorts.
Professor Mildeye arrives at James's house, determined to find the Clock family in order to examine them 'dead or alive'; James's grandmother just wants rid of them, seeing them as vermin as she leaves out mousetraps. James, feigning disbelief at the existence of little people, becomes wary as these events develop.
James is then found sitting in his kitchen selling his toys and games online to raise money for his grandmother and dad so they can keep the house, much to his father's shock. James's father is out a lot for job interviews, leaving James alone and lonely.
Arrietty then starts playing with the snowflakes as Pod and Homily have a talk about her 'mistake'; her mother very much defending her actions as childhood intrigue. After explaining what snow is to Arriety, and after giving her a heated heart-to-heart about the protected life she's had, she storms off in anger, but activates a trap set out to capture them by Professor Mildeye. Pod and Homily push her out of harm's way but are in turn trapped themselves. They are captured and brought to Mildeye's laboratory, while Arrietty and Spiller escape, her father having told Spiller to take care of her.
Back at James's house, him, his father and grandmother are sitting in silence. After his dad leaves for work, James and his grandmother have a talk, with her explaining that his father is away a lot at interviews and jobs so they can have a good Christmas; James doesn't care, he just wants his dad. Grandmother then asks whether it was he who 'borrowed' her late husband's gold watch, to which he strongly denies and storms off.
Spiller tries to explain that he tried everything to save Pod and Homily, but Arrietty is determined to go up and save them. Spiller is shocked and says she will be killed; they depart on hostile terms.
Looking out of a glass jar at the other creatures the Professor has collected, Pod thinks about how to escape, but is happy that his daughter is safe; Homily knows for sure she won't go Underground with Spiller like they told her too. They have a heart-to-heart about which traits their daughter has, and from whom she got them.
Professor Mildeye leaves a message on the Hellman family's answer phone explaining to James's grandmother that he has captured Pod and Homily. James intercepts it, and listens in horror before deleting it and rushing off to the university.
Meanwhile, Arrietty ventures above ground and is nearly killed by a street cleaning vehicle, before being rescued by Spiller who has re-appeared. They head off to a church and hide in the Nativity scene while they work out what to do next.
Speaking out loud to a biology skeleton about the view outside, the Professor recalls his lifelong dream about being the hero now he has the little people. His assistant, slightly thrown by his actions, mentions that there is a problem with the 'specimens'.
The little people appear to be unconscious, and Mildeye is attempting to diagnose what has happened to them. As he and his assistant debate what to do next, the little people escape but are later captured by Mildeye as they hide behind a table leg. As he recaptures them, he realises they can talk.
In the Church, the congregation has gathered and is singing hymns, Spiller smiling and singing along, Arrietty is unsure of why he is doing it; he says that the promises of food are the reason. He then explains that Pod is a hero in the little world, as he saved their community from the human beans, but he failed to save a little girl, as he was faced with a terrible choice: Arrietty's cousin Eggletina or the entire community. Spiller explains that no-one blamed him for her death, but Pod blamed himself and exiled himself to the Hellman's house to live away from the little people community. Spiller agrees to help Arrietty save her parents. They head back to James Hellman's house, as she is sure he can help them.
James arrives at the university, feigning surprise that the Professor was right and the Borrowers do exist. The Professor then shows him Pod and Homily; both of them demanding food, water and their freedom; the Professor says he will allow this when he has finished with them after a very important scientific conference and tests, but then announces this includes dissection. James lies and says these are the only two he knows.
Back home, the grandmother takes a bunch of flowers from the postman; they are from Mildeye who has become infatuated with her. When James's dad arrives home with a model aircraft which is a Christmas present for James, she berates him for wasting money and not being there for his son. She cries and then apologises, but says that he does forget what is really important sometimes. Leaning over, he discovers that a Final Notice has been served on their house as they haven't been able to keep up the mortgage repayments.
james explains to Arrietty and Spiller that Homily and Pod are still alive. Spiller tries to attack James, before Arrietty explains that he's trustworthy. They watch a news clip from BBC News of the anchorman explaining Mildeye's theory, and that there would be a scientific conference the following day. James gives Arrietty and Spiller a safe place to sleep, in a shoebox under his bed. Spiller teases Arrietty as there is only one bed, and she climbs in; pretending to like him, as Spiller leans over, she throws him out of the bed and chucks a pillow after him. Back in the lab, the Clock parents await their fate.
The following morning, James heads to the university with the model aircraft which he found hidden under his late mum's bed, as Mildeye prepares for the conference. Spiller and Arrietty are inside the aircraft, and James launches it (almost crashing it) and flies them above the university building from where, after an intimate moment during which the couple nearly kiss, they are dropped onto the building by makeshift parachutes. They make their way through the air conditioning system to a vent above the glass that Pod and Homily are being kept in.
Meanwhile, James is inside telling Mildeye that there are whole communities of little people living underground, at which point he calls his assistant out of the lab, giving Arrietty and Spiller a chance to rescue Pod and Homily. Homily, in dismay, is shocked to find Pod smiling and laughing and looking upwards, seeing that his daughter and Spiller are rescuing them using string and a paperclip. Mildeye being in the corridor talking to his assistant about James's revelation gives James a chance to open the air conditioning vent in the Professor's office to put a modified remote control car inside for the Borrowers to use as an escape vehicle.
James leaves Mildeye's office, and gives the Professor a board marker. The Professor and his assistant rush back to the office to find that James has drawn silly faces on magazine cut-outs of Mildeye which are hung on the wall. At this point, the Professor realises that his "specimens" are in danger and rushes back to the lab, gaining entry just as Pod is being lifted up towards the air vent. As Mildeye tries to grab him, Spiller attaches himself to the other end of the string and jumps down through the vent, causing Pod to shoot up through it. Spiller, now in the lab, has to escape the Professor and his assistant. Meanwhile above, the Clock family escape as Arrietty drives the modified remote control car through the air vents, while Mildeye chases the sound of the car through the corridors below. They leave the air conditioning system and have to weave between the legs of humans as they drive around the corridors on the floor above, as Mildeye catches up with them. They make it into a lift in the nick of time, while Professor Mildeye rushes down the stairs. As the lift opens, Arrietty drives the car full speed down a corridor and out over a balcony to the reception area below where James is waiting with a rucksack to catch them in. The Professor arrives at the balcony in time to see James catch the car and run away.
When they are safely back home, the Clock family and James watch the conference online to see if Mildeye has caught Spiller. Mildeye instead reveals a doll's jacket, much to the mirth of the crowds of press and scientists They all leave the lecture theatre, leaving Mildeye raging and desperate. As James closes the laptop, Spiller appears behind it announcing 'did you really think they'd catch me!?'. Arrietty finally admits she likes him, to which Spiller says that the only reason he rescued them was to have the gold coin, at which Arietty becomes very angry and throws the coin at him. James picks it up and looks at the coin, which turns out to be the missing rare coin that his Grandmother was asking about.
James places it somewhere that his Grandmother will find it. She finds it while they talk about his mother, sitting on the floor of his mum's bedroom. It turns out that the coin is incredibly valuable, and in the next scene we see that they have sold it to raise money for their house and for Christmas. James's dad is puzzled as to why all of the strawberry cream chocolates are missing from a chocolate tin - earlier in the film, we see Pod 'borrowing' them. James and his grandmother feign ignorance.
Under the floorboards, the Clocks and Spiller have their own Christmas, where Arrietty's parents reveal to her that they're ready to allow her to leave the confines of their underfloor home to go wherever she wants. She is overjoyed, and decides she wants to head back to the Borrower city with Spiller.
Outside, James and the Clocks say goodbye to Arrietty. Arrietty and Spiller slide down the the drainpipe and the film ends with a still of Arrietty shooting out of the end, in mid air.
In the post credits, the Grandmother is seen slipping a strawberry cream chocolate down the hole to the Clocks' home, and whispering "Merry Christmas".