In 1923, on the small fictional Irish isle of Inisherin during the Irish Civil War, folk musician Colm Doherty abruptly begins ignoring his long-time friend and drinking buddy Pádraic Súilleabháin. Pádraic, though nice and well liked by the islanders, is too dull for Colm who wishes to spend the remainder of his life composing music and doing things that he will be remembered for. Pádraic's life is destabilized by the loss of one of his few friends; as Pádraic grows increasingly distressed at the rejection, Colm becomes more resistant to his old friend's attempts to speak to him. Colm eventually gives Pádraic an ultimatum: every time he bothers him or tries to talk with him, he will cut off one of his own left fingers with a pair of sheep shears.

Though Pádraic's caring sister Siobhán and troubled local man Dominic attempt to defuse the pair’s escalating battle, their efforts prove fruitless. After a drunken Pádraic confronts him in the pub and then attempts to apologise, Colm cuts off one of his fingers and delivers it to Pádraic. As the tensions worsen, local elder Mrs. McCormick warns Pádraic that death will come to the island soon. Meanwhile, Siobhán gently rebuffs Dominic’s romantic advances; sick of life on the island, she moves to the mainland for a library job. Colm finishes writing a tune, which he titles "The Banshees of Inisherin", and appears open to rekindling his friendship with Pádraic - until the latter reveals he tricked one of his musician friends to leave the island. In response, Colm cuts off his remaining left fingers with the shears and throws them at the door of Padraic’s cottage. Pádraic's beloved pet donkey Jenny is found dead having choked on one of the severed fingers.

A heartbroken Pádraic blames Colm for Jenny's death. In retaliation, he confronts Colm to tell him he will burn his house down the next day. Pádraic sets the house on fire, taking Colm's dog to safety. As Pádraic leaves he sees Colm sitting inside the burning building. The local policeman, Dominic's abusive father Peadar, goes to Pádraic's house. He is diverted away by Mrs. McCormick, who wordlessly leads him to Dominic's waterlogged corpse floating in the nearby lake, having drowned. The next morning, Mrs. McCormick is outside Colm's burnt out house and finds a chair next to a broken window. Pádraic, with the dog, finds Colm standing on the beach. Colm apologizes for Jenny's death and suggests destroying the house has ended their feud, but Pádraic informs his former friend that it only would have ended if he'd stayed inside the house. As Pádraic turns to leave, Colm thanks him for looking after his dog; to which Pádraic replies, "Any time."