During a battle in the last months of World War I, the protagonist, an unnamed soldier (known only in the credits as A Jewish Barber), is fighting for the Central Powers in the army of the fictional nation of Tomainia, comically blundering through the trenches in combat scenes. Upon hearing a fatigued pilot pleading for help, the Barber attempts to rescue the exhausted officer, Commander Schultz. The two board Schultz's nearby airplane and fly off, barely escaping enemy ground fire. Schultz reveals that he is carrying important dispatches that could win the war. However, the plane loses fuel and crashes in a marsh. They both survive, but the Barber suffers from memory loss. As medics arrive, Commander Schultz gives them the dispatches, but is told that the war has just ended and Tomainia lost.
Years later, as the Barber is released from the hospital, Adenoid Hynkel (also played by Chaplin), the ruthless dictator of Tomainia, has undertaken to persecute Jews throughout his country, aided by Secretary of the Interior and Minister of Propaganda Garbitsch and Minister of War Herring. The symbol of Hynkel's fascist regime is the "double cross", and at times, when he's excited or angry, Hynkel speaks in a macaronic parody of the German language. During his first speech, his Tomainian is "translated" by an overly concise English-speaking news voice-over.
The Barber, unaware of Hynkel's rise to power, returns to his barbershop in the Jewish ghetto. When he opposes the painting of the word "Jew" on his barber shop by storm troopers, he flees from them, aided in part by his neighbor, Hannah, who knocks some of them unconscious with a frying pan. The Barber is nearly lynched by a gang of storm troopers, but Schultz, now a high-ranking officer in Hynkel's regime, intervenes. Though surprised to see the man who saved his life at the end of the war is not an Aryan, as he previously imagined, he returns the favor by ordering the storm troopers to take no action against him or Hannah, even when she throws an object at a storm trooper's head.
Hynkel relaxes his stance on Tomainian Jewry in an attempt to woo a Jewish financier into giving him a loan to support his regime. Egged on by Garbitsch, Hynkel has become obsessed with the idea of being Dictator of the World, dancing at one point with a large, inflatable globe, to the tune of the Prelude to Act I of Richard Wagner's Lohengrin.
Hynkel plans to invade the neighboring country of Osterlich (Austria), and needs the loan to finance the invasion. When the Jewish financier refuses due to the persecution of the Jews, Hynkel reinstates and intensifies his persecution of the Jews contrary to Garbitsch's advice. When Schultz, who is empathetic to the Jews, voices his objection to the pogrom, Hynkel denounces Schultz as a supporter of democracy and a traitor, and orders him placed in a concentration camp. The Barber evades storm troopers who have heard of the arrest by hiding on his neighbor Mr. Jaeckel's roof with Hannah, however his shop is burnt down. Schultz flees to the ghetto and begins planning to overthrow the Hynkel regime with Hannah, the Barber and other residents there. Schultz proposes a suicide mission to blow up the palace, the agent will be chosen by a coin in a pudding. However Hannah causes this to be abandoned by placing coins in all the puddings. Later the Ghetto is searched for Schultz. He and the Barber, hiding on the roof, are captured and condemned to the camp.
Hynkel is initially opposed by Benzino Napaloni, dictator of Bacteria, in his plans to invade Osterlich, and even plans to declare war. However just after he signs a declaration of war he receives a call from Napaloni. He invites him and his wife to his palace and a seeing of a military show to impress him with a display of military might and psychological warfare, but this ends in disaster. After some friction, a comedic food fight between the two leaders, and a deal between the two leaders on which Hynkel immediately reneges, his invasion proceeds. Hannah and others from the Ghetto had emigrated to Osterlich to escape Hynkel, but once again they find themselves living under Hynkel's regime.
Schultz and the Barber escape from the camp wearing Tomainian uniforms. Border guards mistake the Barber for Hynkel, to whom he is nearly identical in appearance. Conversely, Hynkel, on a duck-hunting trip, falls overboard and is mistaken for the Barber and arrested by his own soldiers. The Barber, now forced by circumstance to assume Hynkel's identity, is taken to the capital of Osterlich to make a victory speech. Garbitsch, in introducing "Hynkel" to the throngs, decries free speech and argues for the subjugation of the Jews. The barber then makes a rousing speech, reversing Hynkel's antisemitic policies and declaring that Tomainia and Osterlich will now be a free nation and a democracy. He calls for humanity in general to break free from dictatorships and use science and progress to make the world better instead.
Hannah, now an impoverished laborer in a vineyard in Osterlich, hears the barber's speech on the radio, and is amazed when the Barber addresses her directly: "Hannah, can you hear me? Wherever you are, look up, Hannah. The clouds are lifting. The sun is breaking through. We are coming out of the darkness into the light. We are coming into a new world, a kindlier world, where men will rise above their hate, their greed and brutality. Look up, Hannah. The soul of man has been given wings, and at last he is beginning to fly. He is flying into the rainbow into the light of hope, into the future, the glorious future that belongs to you, to me, and to all of us. Look up, Hannah. Look up!" As she rises, Mr. Jaeckel asks Hannah, "Hannah, did you hear that?" The girl silences him with a gesture, saying, "Listen," and turns her face, radiant with joy and hope, toward the sunlight