Omar, a young, unemployed British-Pakistani, cares for his ailing, alcoholic, socialist father in a decaying South London ground-floor flat overlooking a crumbling rail track. His father (known as Papa to everyone in the family) urges him to go to college, but in the meantime gets him a job washing cars in his Uncle Nasser's garage. Half jokingly, Papa also asks Nasser to find him a girlfriend.
At his uncle's garage, Omar meets Nasser's white mistress, Rachel, and his business partner Salim. Nasser is impressed by Omar's business sense and ambition and gives him the responsibility of running his dilapidated laundrette.
Invited to Nasser's house one evening to meet his family and colleagues, Omar is propositioned by one of his daughters, Tania. While flirting with Omar, Tania lets him know that she knows all about her father's affair. Unknown to her, her mother overhears everything. At the end of the evening, Omar gives a drunken Salim and his wife a lift home. On the way they are subjected to a volley of verbal and physical abuse by a gang of racist youths. One of the gang is Johnny, an old school-friend of Omar's and an ex-National Front member.
Omar breaks the news to his father that he has been promoted to manager of the laundrette and in his excitement tries to contact Johnny. Meanwhile, he runs an errand for Salim, picking up some pornographic? videotapes and bringing them back to his house. Catching Omar watching one of these tapes, an angry Salim knocks him to the floor and violently bruises both of his eyes with his foot.
Johnny agrees to help Omar renovate the laundrette and Omar, in need of further funds to finance the laundrette, agrees to pick up some drugs for Salim. However, Omar and Johnny decide to keep the drugs to sell.
Meanwhile, Nasser agrees to let Johnny into the business if he helps him evict some unwanted tenants. Johnny and Omar begin work on the laundrette and become lovers. Johnny discovers members of the gang vandalizing laundrette dustbins. They demand to know why Johnny has betrayed them by working for Omar and his family. With Johnny's help, Nasser evicts a West-Indian poet from one of his properties and offers the room to Johnny, which he takes.
At Powders Laundrette's grand opening, Nasser nags Omar to marry Tania and he agrees in order to keep the peace. Johnny overhears and leaves. Tania confronts Rachel for the first time about the affair with her father. Salim, who has realised that the laundrette has been financed by the missing drugs, threatens Omar with closure of the laundrette if he doesn't pay him by Nasser's annual party. But a few days later, when Omar offers Salim an installment of his debt, Salim tells him that he never really wanted the money but wanted to teach him a lesson.
After the laundrette is opened, Omar notices that Johnny has left, goes to look for him in his room, and orders him to get back to work. Johnny returns to the laundrette. Papa, Omar's father, mistakenly turns up for the opening ceremony at 2 am instead of 2pm. He confronts Johnny about his neo-Nazi past (when Johnny used to racially taunt him), asking if, since then, he has made anything of himself. Sensing the power of Johnny's influence over his son, Papa asks him to impress on Omar the importance of getting an education.
Tania turns up at the laundrette to tell Johnny she is leaving home. Unable to persuade him to join her, she leaves alone. Rachel and Nasser break up and seeking comfort, Nasser visits his brother, Papa.
Congregating at the laundrette, Johnny's old gang wait for the opportunity to smash up Salim's car. They beat him up and, when Johnny comes to Salim's aid, attack him too. When Omar arrives, a gang member throws a lump of wood through the window of the laundrette. The gang flee at the sound of police sirens, and Omar dresses Johnny's wounds in the back office of the laundrette.
