When the farm's prize-winning pig, Old Major, calls a meeting of all the animals of Manor Farm, he tells them that he has had a dream in which mankind is gone, and animals are free to live in peace and harmony. His ideals can be compared to anarchocommunism. He compares the humans to parasites, and then proceeds to teach the animals a revolutionary song, "Beasts of England". The other animals begin to hope and dream for the revolution of such a day. When Old Major dies, a mere three days later, two pigs -- Snowball (who teaches the animals to read), and Napoleon-- assume command, and turn his dream into a full-fledged philosophy. One night, the starved animals suddenly revolt and drive the farmer Mr. Jones, his wife, and his pet raven off the farm and take control. The farm is renamed "Animal Farm" as the animals work towards a future utopia. The Seven Commandments of the new philosophy of Animalism are written on the wall of a barn for all to read, the seventh and most important of which is that "all animals are equal". All animals work, but the workhorse Boxer does more than his fair share and adopts a maxim of his own — "I will work harder."

Animal Farm is off to a great start. Snowball teaches the other animals to read and write (though few animals besides the pigs learn to read well), food is plentiful due to a good harvest, and the entire Farm is organized and running smoothly. Even when Mr. Jones tries his last-ditch effort to retake control of the farm, the animals easily defeat him at what they later call the "Battle of the Cowshed". Soon, however, things begin to unravel as Napoleon and Snowball begin an epic power struggle over the farm. When Snowball announces his idea for a windmill, Napoleon quickly opposes it. A meeting is held, and when Snowball makes his passionate and articulate speech in favour of the windmill, Napoleon only makes a brief retort and then makes a strange noise to call in nine attack dogs. They burst in and chase Snowball off of the farm. In his absence, Napoleon declares himself the leader of the farm and makes instant changes. He announces that meetings will no longer be held as before, and a committee of pigs alone will decide what happens with the farm.

Napoleon changes his mind about the windmill, claiming (through Squealer, Napoleon's mouth-piece) that Snowball stole the idea from him, and the animals begin to work. After a violent storm, the animals wake to find the fruit of their months of labour utterly annihilated. Though neighbouring farmers scoff at the thin walls, Napoleon and Squealer convince everyone that Snowball destroyed it. Napoleon begins to purge the farm, killing many animals he accuses of consorting with Snowball. In the meantime, Boxer takes a second mantra, "Napoleon is always right."

Napoleon begins to abuse his powers even more and life on the farm becomes harder and harder for the rest of the animals. The pigs impose more and more controls on them while reserving privileges for themselves. History is rewritten to villainise Snowball and glorify Napoleon even further. Each step of this development is justified by the pig, Squealer, who on several occasions alters the Seven Commandments on the barn in the dead of night ("No animal shall drink alcohol" becomes "No animal shall drink alcohol in excess", for example). The song "Beasts of England" is banned as inappropriate now that the dream of Animal Farm has been realised, and is replaced by an anthem glorifying Napoleon who begins to live more and more like a human. The animals, though cold, starving, and overworked, remain convinced that they are still better off than when they were ruled by a man named Jones.

Mr. Frederick, one of the two neighbouring farmers, swindles Napoleon by paying with forged banknotes, and then attacks the farm and uses dynamite to blow up the recently restored windmill. Though the animals of Animal Farm eventually win the battle, they do so at a great cost, as many of the animals, including Boxer, are wounded. However, Boxer continues to work harder and harder, until he finally collapses while working on the windmill. Napoleon sends for a van to come and take Boxer to the veterinarian, but as Boxer is loaded up and the van drives away, the animals read what is written on the side of the van: "Alfred Simmonds, Horse Slaughterer and Glue Boiler." Squealer quickly reports that the van with the old writing has been purchased by the hospital, and later that Boxer has died in the hospital, in spite of the best medical care.

Many years pass, and the pigs learn to walk upright, carry whips, and wear clothes. The Seven Commandments are reduced to a single phrase: "All animals are equal, but some animals are more equal than others." Napoleon holds a dinner party for the pigs, and the humans of the area (in the adjacent Foxwood Farm run by Mr. Pilkington). He announces his alliance with the humans against the labouring classes of both "worlds".

The animals discover this when they overhear Napoleon's conversations and finally realize that a change has come over the ruling pigs. During a poker match, an argument breaks out between Napoleon and Mr. Pilkington when they both play an Ace of Spades, and the animals realise how they cannot tell the difference between the pigs and the humans.

The pigs walked on two feet and they adopted many of Mr. Jones' customs and principles. The pigs have violated every one of the rules set out in the beginning. This is when we come to the theme of this book: power corrupts, and absolute power corrupts absolutely.