NOTE: This spoiler was submitted by Jeremy

The film opens in Darkest Peru, "a few bear years ago". Uncle Pastuzo (Michael Gambon) and Aunt Lucy (Imelda Staunton) are enjoying marmalade sandwiches over a bridge as they discuss their plans to visit London. Just then, Lucy sees a cub floating down the river, heading toward the falls. Pastuzo lowers Lucy down to rescue the cub, but they are nearly pulled into the river themselves. Pastuzo manages to hold on as Lucy saves the cub. She tells Pastuzo that their plans to go to London are done, as they now have a cub to raise.

Paddington (Ben Whishaw) has become comfortable in his new home in Windsor Gardens with the Brown family. He writes to Aunt Lucy to let her know what has been going on with the family. Mary (Sally Hawkins) has been illustrating adventure books, but she wants to take an adventure of her own and go swimming to France. Judy (Madeleine Harris) has broken up with her boyfriend and has started to work for her school's newspaper. Jonathan (Samuel Joslin) goes by "J-Dog" to appear cool while hiding his love for steam engines. Henry (Hugh Bonneville) has been passed up for a promotion at work and Mrs. Bird (Julie Walters) says he is going through a midlife crisis.

Paddington rides through town with some of the folks in the neighborhood that he has become friendly with thanks to all the help he provides them. He arrives at the antique shop of Mr. Gruber (Jim Broadbent). Paddington wants to find a present for Aunt Lucy's 100th birthday, and he wants her gift to be something special. He spots a pop-up book of London made by a famed circus owner named Madame Kozlova. Paddington thinks it's perfect because it will give Lucy a look at London. However, Mr. Gruber informs Paddington that the book is very pricey, so Paddington declares he is going to get a job and raise money to buy the book.

Paddington first takes a job working at a barbershop sweeping up the floor. A customer, Gerald Biggleswade (Tom Conti), enters and orders a light trim from Paddington, despite him not actually being a barber. Paddington attempts to go ahead anyway, only to get tangled up while trying to use the electric razor. It gets caught on the ceiling and Paddington ends up accidentally shaving the back of Gerald's head. He then tries to fix it with marmalade, until Gerald finds out what happened. Paddington's boss then enters as he sees what's happened, and then the sprinklers go off thanks to the razor short-circuiting.

After getting fired, Paddington joins the Browns at a fair. There, they see renowned actor Phoenix Buchanan (Hugh Grant), who is a client of Henry's. He puts on a small show to open up the fair, and has Paddington go up as a volunteer. Paddington makes unintentional jokes at Phoenix's expense regarding his acting career now being reduced to making dog food commercials. He also mentions the book and wanting to get it for Aunt Lucy.

Paddington starts to go around Windsor Gardens as a window cleaner. His work even manages to get a grumpy colonel out of his room and out to talk to the local newspaper vendor. Paddington starts to raise more money until he starts working downtown in London.

Paddington walks by Mr. Gruber's shop when he spots a thief breaking into the store. He runs inside to try and catch the thief, but he steals the book and makes off with it. Paddington calls upon a stray dog, Wolfy, to help chase after the thief, but once Paddington catches up to him, the thief vanishes in a puff of smoke. The police arrive and take Paddington into custody, walking him through Windsor Gardens where the Browns and all the neighbors watch Paddington being taken in handcuffs. The Browns plead with the police and try to assure them that Paddington is innocent.

The thief turns out to be Phoenix. He talks to his many disguises and mentions that he didn't just take any ordinary pop-up book. The book contains clues that literally point to famous landmarks across London that lead to the hidden fortune of Madame Kozlova.

Paddington is put on trial. To his dismay, his judge happens to be Gerald. Some evidence, like his paw prints in the shop and traces of marmalade, is used against him. The damning testimony comes from Phoenix, who is the Browns' neighbor and claims to have not seen the thief as he passed by. Thus, Paddington is sentenced to ten years in prison.

Paddington starts out prison by trying to make the best of his situation. He is assigned laundry duty, but he messes it up when he throws a red sock into the wash with the inmates' uniforms, causing them all to turn pink. When he goes to the cafeteria, Paddington complains about the mush that they feed the inmates, but they warn him not to say anything to the chef, as he is apparently quite nasty. Paddington approaches the chef, Knuckles McGinty (Brendan Gleeson), and very openly makes his criticisms in front of the terrified inmates. Knuckles threatens to cook Paddington until the bear stuffs a marmalade sandwich into Knuckles' mouth. Astonished by the taste of it, Knuckles tells the inmates that Paddington is under his protection under the condition that he helps make the marmalade sandwiches.

Paddington begins working in the kitchen with Knuckles. While Knuckles is grumpy and rude at first, Paddington manages to get him to work with him in making the sandwiches. They debut their sandwiches at breakfast, which all the other inmates fall in love with. The inmates then all work together to make sweet treats in the prison based on recipes they remember.

Meanwhile, the Browns work tirelessly to prove Paddington's innocence. Mary and the kids follow a lead when they go to a church that Phoenix invaded while disguised as a nun. He pushes a statue off its base and shattered it after finding his next clue. The Browns later visit Paddington and meet his inmate buddies as they try to figure out who the culprit could be based on the sketches Mary has drawn up. Knuckles takes a look at the drawings, but says he cannot figure out whether or not they are gang members.

The Browns visit the fair to find Madame Kozlova (Eileen Atkins) to see just what is so special about the book. She tells them about how her grandmother, the original Madame Kozlova, started the fair while also working as a trapeze artist. The show's magician (who happened to be Phoenix's grandfather) sought her wealth and even sabotaged her play to have her killed during her show. When he didn't find anything, he disappeared without a trace.

Mary visits Phoenix in his home, and she becomes suspicious when he comments on the thief having "dazzling blue eyes", despite him only having seen the sketch. Mary immediately pins him as the prime suspect, though Henry thinks she's crazy. Mary gets Jonathan and Judy to help her as they plan to get proof that he's the thief. The kids meet with Phoenix's agent, Felicity Fanshaw (Joanna Lumley), who does a brief interview for the kids that they record and use to trick Phoenix into thinking Felicity is calling him for a Broadway audition. With him out of the house, Mary sneaks inside to find evidence, but Henry spots her from far away. He goes to get her out, but Phoenix returns home and finds them. They manage to get out by pretending they are there for a home inspection. The Browns then go to the police to say that Phoenix is the culprit, but the officer tells them they need the book with Phoenix's fingerprints to implicate him. The family then realizes what time it is, and that they have missed their visiting time for Paddington. The little bear is left heartbroken, thinking his family has forgotten him.

At night, Paddington joins Knuckles, plus inmates Spoon (Aaron Neil) and Phibs (Noah Taylor), to break out of prison and ride a hot air balloon under the impression that the men are going to help clear Paddington's name. However, Knuckles tells Paddington they are skipping town and riding a plane to get away. Paddington feels betrayed and runs off to try and clear his name himself. He finds a pay phone and calls the Browns, but no one answers, so he leaves a message. The phone rings as Paddington walks away, and he answers to hear Mary and Mrs. Bird. They tell him that Phoenix is the thief but they don't know how to catch him. They mention the phrase "Where all your dreams come true", which Mary saw in Phoenix's apartment, and is also the slogan of the Madame Kozlova's fair. They realize that the fortune is hidden in the organ, and that the fair is leaving from Paddington Station. The Browns rush to join Paddington, but their car stalls. The neighbors all help push it so that the Browns can save Paddington.

Paddington sneaks around the station and spots Phoenix boarding the train with the organ. He hops on and follows, but the Browns miss the train. They spot another train, which Jonathan conducts to follow the other train. Phoenix manages to unlock the organ using musical notes as a password, revealing the treasure. Unfortunately for him, Paddington takes the book and startles him, causing Phoenix to accidentally close the organ. Meanwhile, Henry, Judy, and Mrs. Bird board the train that Paddington is on. They attempt to confront Phoenix, only for him to lock them in a cart. Paddington attempts to make it to the other train, but Phoenix stops him and locks him in a cart that he derails. Before Phoenix can gloat, the Browns have freed themselves, and Henry beans Phoenix in the head with a ball to knock him out. Paddington's cart then falls into a river, and Mary goes to rescue him. She can't get the cart open, but Knuckles, Phibs, and Spoon come to help after landing their plane, having seen the whole thing from the sky. They pull Paddington out of the water.

Three days later, Paddington wakes up after falling ill. The Browns tell him that Phoenix has been locked up, and Paddington is a free bear. However, since the book had to be taken in as evidence, Paddington is upset that he doesn't have a gift to send to Aunt Lucy, as her birthday is that day. The Browns tell him not to worry, as they have a surprise for him. They bring Paddington downstairs to see that all the neighbors have gathered as a thank-you to Paddington for all that he's done. There is a knock at the door, and Paddington goes to answer to find Aunt Lucy, who was flown in so that she could truly experience London. Paddington hugs her and wishes her a happy birthday.

During the credits, we see scrapbook pictures from Aunt Lucy's trip around London. We also learn that Henry got a promotion, Mary swam across the channel like she wanted, Judy's newspaper takes off, and Jonathan continues to make model steam trains. Also, Knuckles, Phibs, and Spoon were pardoned and are now officially free men, with Knuckles opening up his own sandwich shop, which pulls in great business. Finally, we see that Phoenix is serving his sentence, but he manages to put on a show in prison for the other inmates, making him feel truly happy.

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Paddington wants to raise money to buy a London pop-up book for Aunt Lucy's 100th birthday, but the book is stolen by the actor Phoenix Buchanan, and Paddington is framed for the crime.

While the Brown family works to prove Paddington's innocence, the bear makes friends in prison and changes the heart of some of the inmates. He ends up breaking out of prison when he is led to believe the other inmates will help clear his name, but they just want to skip town. Paddington learns from the Browns that Phoenix is the thief, and they are going to catch him from Paddington Station.

The family goes after Phoenix and they manage to catch him and have him locked up, allowing Paddington to be free. Although upset that he couldn't get the book for Aunt Lucy, the Browns and their neighbors surprise Paddington by having Aunt Lucy flown into London so that she may get an authentic London experience.

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