Scene I: Lady Sneerwell, a wealthy young widow, and her hireling Snake discuss her various scandal-spreading plots. Snake asks why she is so involved in the affairs of Sir Peter Teazle, his ward Maria, and Charles and Joseph Surface, two young men under Sir Peter's informal guardianship, and why she has not yielded to the attentions of Joseph, who is highly respectable. Lady Sneerwell confides that Joseph wants Maria, who is an heiress, and that Maria wants Charles. Thus she and Joseph are plotting to alienate Maria from Charles by putting out rumours of an affair between Charles and Sir Peter's new young wife, Lady Teazle. Joseph arrives to confer with Lady Sneerwell. Maria herself then enters, fleeing the attentions of Sir Benjamin Backbite and his uncle Crabtree. Mrs. Candour enters and ironically talks about how "tale-bearers are as bad as the tale-makers". Soon after that, Sir Benjamin and Crabtree also enter, bringing a good deal of gossip with them. One item is the imminent return of the Surface brothers' rich uncle Sir Oliver from the East Indies, where he has been for fifteen years; another is Charles' dire financial situation.
Scene II: Sir Peter complains of Lady Teazle's spendthrift ways. Rowley, the former steward of the Surfaces' late father, arrives, and Sir Peter gives him an earful on the subject. He also complains that Maria has refused Joseph, whom he calls "a model for the young men of the age", and seems attached to Charles, whom he denounces as a profligate. Rowley defends Charles, and then announces that Sir Oliver has just arrived from the East Indies.
Scene I: Sir Peter argues with his wife, Lady Teazle, refusing to be "ruined by [her] extravagance." He reminds her of her recent and far humbler country origins. Lady Teazle excuses herself by appealing to "the fashion", and departs to visit Lady Sneerwell. Despite their quarrel, Sir Peter still finds himself charmed by his wife even when she is arguing with him.
Scene II: At Lady Sneerwell's, the scandal-mongers have great fun at the expense of friends not present. Lady Teazle and Maria arrive; Lady Teazle joins in, but Maria is disgusted. So is Sir Peter, when he arrives, and rather breaks up the party with his comments. He departs, the others retire to the next room, and Joseph seizes the opportunity to court Maria, who rejects him again. Lady Teazle returns and dismisses Maria, and it is revealed that she is seriously flirting with Joseph – who doesn't want her, but cannot afford to alienate her.
Scene III: Sir Oliver calls on his old friend Sir Peter. He is amused by Sir Peter's marriage to a young wife. Their talk turns to the Surface brothers. Sir Peter praises Joseph's high morals but Sir Oliver suspects that he might be a hypocrite.
Scene I: Sir Oliver describes his plan to visit each of the brothers in a diguised manner to test their characters. He will disguise himself as their needy relative Mr. Stanley, and ask each for his help. Rowley also brings in the "friendly Jew" Moses, a moneylender who has tried to help Charles, to explain Charles' position. Moses mentions that he is to introduce Charles to yet another moneylender ("Mr. Premium") that very evening. Sir Oliver decides that with Moses' assistance, he will pose as Premium when visiting Charles (still intending to visit Joseph as Stanley).
Sir Peter is left alone and when Maria enters, he tries to convince her to marry Joseph expressing him as a worthier match than Charles, whom she favours. When she is not persuaded, he threatens her with "the authority of a guardian". She goes, and Lady Teazle enters asking her husband for two hundred pounds. Sir Peter and Lady Teazle argue again, and conclude that they should separate.
Scene II: Sir Oliver (as Mr. Premium) arrives with Moses at Charles' house. While they are waiting in the hall, Trip, the servant, tries to negotiate a loan on his own account from Moses. Sir Oliver concludes that "this is the temple of dissipation indeed!"
Scene III: Charles and his raucous guests drink heavily and sing merry songs, as they prepare for a night of gambling. Charles raises a toast to Maria. Moses and "Premium" enter, and Sir Oliver is dismayed at the scene. Charles does not recognise his long-lost uncle. Charles frankly asks "Premium" for credit, noting that Sir Oliver (whom he believes is in India) will soon leave him a fortune. "Premium" discounts this possibility, noting that Sir Oliver could live many years, or disinherit his nephew. He asks if Charles has any valuables of his own to sell for immediate cash. Charles admits that he has sold the family silver and his late father's library, and offers to sell "Premium" the family portrait collection. "Premium" accepts, but Sir Oliver is silently outraged.
Scene I: Charles goes on to sell all of the family portraits to "Premium", using the rolled-up family tree as an auction-hammer. However, he refuses to sell the last portrait, which is of Sir Oliver, out of respect for his benefactor; Charles will not sell it even when "Premium" offers as much for it as for all the rest. Moved, Sir Oliver inwardly forgives Charles. Sir Oliver and Moses leave, and Charles sends a hundred pounds of the proceeds for the relief of "Mr. Stanley", despite Rowley's objection.
Scene II: Sir Oliver, reflecting on Charles's character with Moses, is met by Rowley, who has brought him the hundred pounds sent to "Stanley." Declaring "I’ll pay his debts, and his benevolence too", Sir Oliver plans to go meet his other nephew in the person of Stanley.
Scene III: Joseph, anxiously awaiting a visit from Lady Teazle, is told by a servant that she has just left "her chair at the milliner's next door" and so has the servant draw a screen across the window (his reason: "my opposite neighbour is a maiden lady of so curious a temper"). On her entrance, Joseph forswears any interest in Maria, and flirts in earnest with Lady Teazle, perversely suggesting that she should make a "faux pas" for the benefit of her reputation. The servant returns to announce Sir Peter, and Lady Teazle hides in panic behind the screen. Sir Peter enters and tells Joseph that he suspects an affair between Charles and Lady Teazle (due to the rumours spread by Joseph and Lady Sneerwell). Joseph hypocritically professes confidence in Charles' and Lady Teazle's honour. Sir Peter confides his intention to give his wife a generous separate maintenance during his life and the bulk of his fortune on his demise. He also urges Joseph to pursue his suit with Maria (much to Joseph's annoyance, as Lady Teazle is listening behind the screen).
Charles's arrival is announced. Sir Peter decides to hide, and have Joseph sound Charles out about his relationship with Lady Teazle. He starts behind the screen, but sees the corner of Lady Teazle's petticoat there already. Joseph "confesses" that he is not as virtuous as he seems: "a little French milliner, a silly rogue that plagues me" is hiding there to preserve her own reputation. Sir Peter then hides in the closet.
Charles now enters and Joseph questions him about Lady Teazle. Charles disclaims any designs on her, noting that Joseph and the lady seem to be intimate. To stop Charles, Joseph whispers to him that Sir Peter is hiding in the closet, and Charles hauls him forth. Sir Peter tells Charles he now regrets his suspicions about him. Charles passes off his comments about Joseph and Lady Teazle as a joke.
When Lady Sneerwell is announced, Joseph rushes out to stop her from coming up. Meanwhile, Sir Peter tells Charles about the "French milliner". Charles insists on having a look at her and flings down the screen as Joseph returns, discovering Lady Teazle. Charles, very amused, leaves the other three dumbstruck individuals. Joseph concocts an explanation for Sir Peter of why he and Lady Teazle are together. But she refuses to endorse it and admits that she came to pursue an affair with Joseph; however, having learned of Sir Peter's generosity, she has repented. She denounces Joseph and exits, and the enraged Sir Peter follows as Joseph continues trying to pretend innocence.
Scene I: Sir Oliver (as Mr. Stanley) now visits Joseph. Joseph, like Charles, does not recognise his long-lost uncle. He greets "Stanley" with effusive professions of goodwill, but refuses to give "Stanley" any financial assistance, saying he has donated all his money to support Charles. "Stanley" suggests that Sir Oliver would help him if he was here, and that Joseph might pass on some of what Sir Oliver has given him. But Joseph tells "Stanley" that Sir Oliver is in fact very stingy, and has given him nothing except trinkets such as tea, shawls, and "Indian crackers". Furthermore, Joseph has lent a great deal to his brother, so that he has nothing left for "Stanley". Sir Oliver is enraged, as he knows both statements are flat lies – he sent Joseph 12,000 pounds from India. He stifles his anger, and departs amid further effusions. Rowley arrives with a letter for Joseph announcing that Sir Oliver has arrived in town.
Scene II: At Sir Peter's house, Lady Sneerwell, Mrs. Candour, Sir Benjamin, and Crabtree exchange confused rumours about the Teazle affair. Sir Benjamin says Sir Peter was wounded in a swordfight with Joseph Surface, while Crabtree insists it was a pistol duel with Charles. When Sir Oliver enters, they take him for a doctor and demand news of the wounded man. At that moment Sir Peter arrives to prove the report wrong, and orders the scandalmongers out of his house. Sir Oliver says he has met both of his nephews and agrees with Sir Peter's (former) estimate of Joseph's high character, but then acknowledges with laughter that he knows the story of what happened at Joseph's with the closet and screen. When he leaves, Rowley tells Sir Peter that Lady Teazle is in tears in the next room, and Sir Peter goes to reconcile with her.
Scene III: Lady Sneerwell complains to Joseph that Sir Peter, now that he knows the truth about Joseph, will allow Charles to marry Maria. They plot to use Snake as a witness to a supposed relationship between Charles and Lady Sneerwell, and she withdraws.
Sir Oliver arrives. Joseph takes him for "Stanley" and orders him out. Charles arrives and recognises "Premium". Despite the identity confusion, both brothers want the man out before Sir Oliver comes. As Charles and Joseph try to eject their incognito uncle, Sir Peter and Lady Teazle arrive with Maria, ending Sir Oliver's pretense. Sir Oliver, Sir Peter, and Lady Teazle together condemn Joseph, but Sir Oliver forgives Charles because of his refusal to sell Sir Oliver's picture and his generous aid to his uncle "Stanley." Maria, however, declines to give Charles her hand, citing his supposed involvement with Lady Sneerwell. Joseph now reveals Lady Sneerwell. Charles is baffled, and Rowley then summons Snake. Snake, however, has been bribed to turn against Sneerwell, so her lie is exposed. After Lady Teazle tells her that she (Lady Teazle) is withdrawing from the School for Scandal, Lady Sneerwell leaves in a rage, and Joseph follows, supposedly to keep her from further malicious attacks. Charles and Maria are reconciled. Charles makes no promises about reforming, but indicates that Maria's influence will keep him on a "virtuous path." The concluding line assures the audience that "even Scandal dies, if you approve."
The humorous epilogue, written by George Colman the Elder, is to be "Spoken by Lady Teazle." It portrays her as somewhat regretful of leaving country domesticity for London society, and includes an elaborate parody of a famous speech in Shakespeare's Othello.