Matilda Wormwood (Mara Wilson) is an intelligent girl with a bright personality, but her parents, Harry and Zinnia (Danny DeVito and Rhea Perlman), neglect and mistreat her. When she reaches four, she discovers the local library and walks there every day to read while her father is at work, her mother playing bingo and her older brother, Michael (Brian Levinson), is at school.
By age six-and-a-half, Matilda begins to lose patience with her parents. In retaliation for her father's constant lecturing, she mixes his hair tonic with her mother's hair dye, which turns his hair an unhealthy blonde. He takes his children to his workshop, where he reveals that the cars he sells are faulty. Matilda accuses him of being dishonest and he belittles her, so she responds by putting super-super-glue in his hat, forcing Zinnia to cut it off. She reads a borrowed library copy of Moby Dick, which Harry then tears up, calling it filth, reacting to the title while her family is watching television. When he tries to force her to watch with them, she grows increasingly angry and the television suddenly explodes.
Agatha Trunchbull (Pam Ferris) is the principal of a run-down preparatory school, Crunchem Hall. Harry enrolls Matilda there, where she befriends several children and learns of Trunchbull's violent nature and overtly harsh punishments of the students. Matilda's teacher, Jennifer Honey (Embeth Davidtz), is a kind woman who adores her class and takes an immediate liking to Matilda. She talks to Trunchbull and requests that Matilda be moved up to a higher class, but she refuses. Miss Honey pays Matilda's parents a visit and requests that they pay more attention to and enrich her, but they don't care enough to listen. Meanwhile, Matilda discovers that her family is under surveillance by FBI agents (Paul Reubens and Tracey Walter) due to her father's illegal dealings, but her parents refuse to believe her.
Sometime later, Trunchbull goes to Miss Honey's class for a weekly "check-up" and starts to belittle the students. As a prank, Lavender (one of Matilda's friends) places a newt in Miss Trunchbull's water jug to frighten her. Upon discovery of the newt, Trunchbull accuses Matilda, whose anger at the injustice leads her to telekinetically tip the glass over, splashing water and the newt on Trunchbull. Miss Honey invites Matilda to her house for tea. On the way, they pass the house of Trunchbull, and Miss Honey reveals her secret; when she was two years old, her mother died, so her father, Magnus, invited his sister-in-law, Trunchbull, to live with them and look after Miss Honey. However, she mistreated and abused her at every opportunity. When Miss Honey was five, her father died of an apparent suicide. Eventually, she moved out of her aunt's house and into a small cottage. She and Matilda briefly sneak into Trunchbull's house while she is out in order to obtain some of Miss Honey's belongings, but her unexpected return leads to a cat-and-mouse chase, with them only barely escaping.
When Matilda's telekinetic powers manifest again during an argument with Harry, she trains herself to use them at her own will. She returns to Trunchbull's house, wreaking havoc in an attempt to scare her away, repeatedly causing her clock to strike the hour, opening the windows, and turning the lights on and off. She almost flees, but she finds Matilda's hair ribbon and realizes that she was there. The next day, Trunchbull visits Miss Honey's class again to get Matilda to admit her guilt. She uses her powers to write a message on the blackboard, posing as the ghost of Magnus, and accusing Trunchbull of murdering him. She attacks the students, but Matilda keeps them out of harm's way with her powers, and they force her out of the school. Miss Honey moves back into her true home.
The FBI finally uncovers enough evidence to prosecute Harry, and the Wormwoods prepare to flee to Guam. They stop by Miss Honey's house to pick up Matilda, but she refuses to go with them. In that moment, Zinnia laments on her guilt and regret in not understanding her daughter better. She and Harry sign the adoption papers that allow Miss Honey to adopt her. They escape, while Matilda lives a happy life with Miss Honey, who, in addition to her teaching duties, becomes the new principal.