Act I - A country glade near London

The curtain rises on a group of dancing fairies. They bemoan the absence of Iolanthe, a fairy who was banished from their midst because she married a mortal, whom she was forbidden ever to see again. The fairy Queen agrees to pardon her and asks her why she chose to live at the bottom of the stream running through the glade. She explains that she wanted to be near her son, Strephon. He is now twenty-five, an Arcadian shepherd, and is in love with Phyllis, a shepherdess and a ward in Chancery (an orphan in the care of the court of the Lord Chancellor of England). Iolanthe introduces Strephon to his "aunts" and he tells them that the Lord Chancellor has refused to consider his marriage to Phyllis since he is a "mere shepherd." The Queen promises him her protection as the fairies depart. Phyllis comes in and after a rapturous song, the two lovers decide to defy the Lord Chancellor's decree.

The members of the House of Lords enter in solemn procession. They are all madly in love with Phyllis, including the Lord Chancellor himself, although he feels it improper to woo her in his capacity as her guardian. The noblemen invite Phyllis to join them and beg her to choose on of their number. She refuses and Strephon appears to claim her as his own. The lords, mortally offended, leave. Strephon again appeals to the Lord Chancellor to reconsider, on the grounds that Nature, herself, approves the match. The Lord Chancellor, however, is adamant, nothing that "there is no evidence before the court that Chorused Nature has interested herself in the matter."

The downcast Strephon is comforted by Iolanthe, but they are seen by Phyllis and the peers, who assume he is in dalliance with another maiden, for Iolanthe, as a fairy, looks an eternal seventeen. His explanation that she is his mother is greeted with understandable derision and Phyllis agrees to marry either of the Lords Mountararat or Tolloller, the two richest peers. Strephon summons the fairies to his aid, but they are rudely treated by the lords, who mistake them for the interfering members of a "ladies seminary." The offended Queen avenges herself by declaring that Strephon will enter Parliament. With his fairy powers, he will abolish all the Lords' cherished privileges and make a peerage obtainable by competitive examination. The nobles can only protest in helpless defiance as the curtain falls.

Act II - The House of Lords

Private Willis, a philosophical guardsman on duty outside Parliament, comments on the foibles of politicians. The curtain now rises on Strephon, as he wreaks havoc on the peers, with the help of the fairies (who find the noblemen most attractive). After proclaiming their own value to society, the Lords make a dignified exit. The Queen is shocked by her band's laxity, demanding that they subdue their natural impulses. She notes that she, too, is attracted to Private Willis, but crushes her feelings for him.

Phyllis is miserable despite her betrothal to two noblemen at once. For their part, they cannot decide which of them will be the lucky man. They almost fight a duel, but, deciding that discretion is the better part of valour, they both renounce her in "friendship's name." The lovesick Lord Chancellor stumbles in and describes a nightmare that has tormented him. Tolloller and Mountararat convince him to apply to himself, in the hope that he can persuade himself to consent to his own marriage with Phyllis, and the three of them dance off in high spirits.

Phyllis and Strephon meet and he finally reveals his own fairy parenthood, which explains his mother's youthful appearance. They are reconciled and appeal to Iolanthe to intercede on their behalf with the Lord Chancellor. She now tells them that he is none other than her husband and Strephon's father, but that it is death for her to reveal herself to him. At this moment he enters jubilantly, having successfully obtained his own consent to his marriage with Phyllis. Iolnahte, veiled, pleads with him in the name of his long-dead wife (herself) to let the young lovers unite. Although deeply moved, he refuses. Once more incurring the penalty of death, she removes her veil, while the fairies mourn without.

The Queen pronounces her doom, but all the fairies announce that they, too, deserve death, having married mortals. They are now all duchesses, countesses and baronesses. The Queen, wanting to maintain her fairy laws, but not wanting to slaughter the whole band, is in a dilemma. It is solved by the Lord Chancellor, who suggests changing the law to read that "every fairy shall die who does NOT marry a mortal." Now the Queen, herself, needs a groom and proposes to Private Willis. He accepts with alacrity and agrees to join her in her fairy kingdom. The entire House of Lord, realising that, now that peers must pass an exam, they have little to stay for, emulates him and all depart happily for Fairyland.