Billy Fisher is a young Yorkshireman living at home with his parents and Grandmother. He fights the boredom of his humdrum existence as an undertaker's clerk by constant daydreaming and flights of fancy. Much of this fantasy life is centred on an imaginary country called Ambrosia, where Billy is the ruler and military hero. He also makes up stories about himself and his family to make life more interesting, earning him the nickname 'Billy Liar'.

Billy yearns to get away from his stifling existence. After an encouraging letter, he hopes to get a job scriptwriting for comic Danny Boon, who is visiting town, so plans to give in his resignation at the undertakers, Shadrack and Duxbury, where he works.

At work he panics over 300 work calendars that he has neglected to post, instead pocketing the postage money. When he tries to give in his resignation Shadrack refuses to accept it, telling him that he knows about the calendars and that he has to repay the company.

Billy's lying extends to his romantic life. He has proposed to two different girls, the drippy Barbara and the brassy Rita, and lies constantly to obtain the ring from one to return to the other. In town Billy and his friend spy his former girlfriend Liz, a free spirit who shares Billy?s imagination but is more courageous, and has travelled extensively.

Billy meets Barbara and tries to persuade her to make love. She refuses and instead dwells on her own fantasy of sharing a country cottage together when they are married. Meanwhile Rita visits the jewellers and discovers that the ring is not being altered as Billy has claimed. Rita calls round at the Fishers. Although Billy stops her meeting his parents a family row ensues in which Billy shouts at his grandmother.

Billy goes to the hotel to see Danny Boon, but Boon has no interest in Billy or his scripts.

Both Rita and Barbara are expecting to see him at The Roxy nightclub. Billy sneaks in and sees Liz. She tells him that they should go to London and that changing your life is easy. The band strike up with a song he and Arthur have written, but he is embarrassed over their announcement that he is going to London to be a scriptwriter. He bumps into Barbara and Rita who fight each other over the ring.

He slips out of the club with Liz, who makes her feelings for him clear. He tells her about Ambrosia and his imaginary world and she understands, despising the restrictions of small town life. They start to make love but are disturbed by Billy's colleague Stamp and his friends who mock his Ambrosia dreams. Liz tells him to meet her at the station at midnight for the overnight train to London.

Billy goes home to pack but finds that his Grandmother is seriously ill and has been taken to hospital. After a row with his father he goes to the hospital. He waits with his mother and they find out his grandmother has died. He rushes to the station and meets Liz. They board the train but a nervous Billy claims he needs milk from a machine and deliberately misses the departure. As the train leaves Liz looks at him ruefully, having left his suitcase on the platform.

As Billy walks back home he imagines himself at the head of the marching army of Ambrosia.