Brian Roberts, a young, fresh-faced British student at Cambridge University, arrives in Berlin in 1931 to complete his studies in German. He has little money but plans to teach English in order to support himself, and to live very frugally. With this in mind he takes a room at a cheap and cheerful boarding house, where he meets Sally Bowles, a Bohemian and rather wild young cabaret singer at the Kit Kat Klub. Brian is as reserved as Sally is flamboyant. She is attracted to him but suspects that he is gay. He tells her that his three previous attempts with women have been a failure, but after the two become friends, and subsequently lovers, Sally concludes that his prior failures were not about his sexuality at all; they must have been the wrong women.
Sally, who has a string of lovers in addition to Brian, befriends the wealthy Baron Maximilian von Heune. He is a generous playboy and invites Sally and Brian to his country estate for the weekend, but it is not immediately apparent which of the friends he is trying to seduce. After a sexual encounter with Brian, von Heune becomes bored and leaves for Argentina. When Sally tells Brian that she's been sleeping with Max, Brian responds that he has as well. Although they fight, they make up, and Sally reveals that Max has left some money for them, bitterly comparing the amount he has left for them to the cost of hiring two prostitutes at the same time.
When Sally discovers that she is pregnant, Brian offers to take her back to Cambridge with him. At first she finds the idea appealing, but after Brian seems to become distant and disinterested, she begins to rethink everything, unable to picture herself as a faculty wife with nothing to do. She also realizes that she is not ready to be a mother and has an abortion. She and Brian come to an understanding, and he returns to Britain whilst she remains behind in Berlin. She throws herself into life at the Kit Kat Klub, but in the final shot of the movie we see men in Nazi uniforms in the front row of the club.
Whilst Sally and Brian are working through their lives, two other members of their inner circle, Frittz Wendel, a German Jew passing himself off as a Christian, and Natalia Landauer, a rich Jewish heiress, are also navigating their relationship. Fritz's main goal in life is to become a gigolo and avoid gainful employment so as soon as he meets Natalia he is attracted to her wealth. He later genuinely falls in love with her but unfortunately Natalia is suspicious of his motives. After Sally gives Fritz some much-needed advice, he manages to assuage Natalia's suspicions and she reciprocates his feelings. However, in order to get her parents' approval for their marriage, Fritz must admit that he is actually Jewish. This is very dangerous because of the rising Nazi regime who are already treating Jewish citizens differently and badly. The rise of the regime is a sub-plot in the movie, and as it proceeds there are more and more characters in Nazi uniforms, culminating in the final scene with Nazi officers in the front row of the Kit Kat Klub.
