diff --git a/update-overlay/create-pr-if-necessary.js b/update-overlay/create-pr-if-necessary.js
index fa07b08..5ed7610 100644
--- a/update-overlay/create-pr-if-necessary.js
+++ b/update-overlay/create-pr-if-necessary.js
@@ -256,6 +256,46 @@ module.exports = async ({github, context, core}) => {
       return treeEntries;
     }
 
+    async function removeMissingPluginDirectories() {
+      const directories = pluginDirectories.split('\n').filter(Boolean);
+      const queryFields = directories
+        .map((directory, index) =>
+          `directory${index}: object(expression: "${workspaceCommit}:${directory}/package.json") { ... on Blob { oid } }`,
+        )
+        .join('\n');
+      const response = await github.graphql(`
+        query PluginDirectories($owner: String!, $repo: String!) {
+          repository(owner: $owner, name: $repo) {
+            ${queryFields}
+          }
+        }`, {
+        owner: pluginsRepoOwner,
+        repo: pluginsRepoName,
+      });
+      const existingDirectories = directories.filter((directory, index) => {
+        if (response.repository?.[`directory${index}`]) {
+          return true;
+        }
+        core.warning(
+          `Skipping plugin directory ${directory}: it does not exist at source commit ${shortRef(workspaceCommit)}.`,
+        );
+        return false;
+      });
+
+      if (existingDirectories.length === 0) {
+        throw new Error(
+          `Workspace ${workspaceName} has no plugin directories at source commit ${workspaceCommit}.`,
+        );
+      }
+
+      newPluginsYamlContent = existingDirectories
+        .map(directory => directory.replace(new RegExp(`^${workspacePath}/(.*)$`), '$1'))
+        .map(directory => `${directory}:`)
+        .join('\n') + '\n';
+    }
+
+    await removeMissingPluginDirectories();
+
     const workspaceCheck = await checkWorkspace(overlayRepoBranchName);
     if (workspaceCheck.status === 'sourceEqual') {
       if (!force) {
diff --git a/update-overlay/create-pr-if-necessary.test.js b/update-overlay/create-pr-if-necessary.test.js
new file mode 100644
index 0000000..6e8bb24
--- /dev/null
+++ b/update-overlay/create-pr-if-necessary.test.js
@@ -0,0 +1,82 @@
+const assert = require('node:assert/strict');
+const test = require('node:test');
+
+const updateOverlay = require('./create-pr-if-necessary.js');
+
+test('omits directories absent from the selected source commit', async () => {
+  let createdTree;
+  const core = {
+    getInput(name) {
+      return {
+        overlay_repo: 'redhat-developer/rhdh-plugin-export-overlays',
+        plugins_repo: 'redhat-developer/rhdh-plugins',
+        overlay_repo_branch_name: 'main',
+        target_pr_branch_name: 'workspaces/main__homepage',
+        backstage_version: '1.54.0',
+        match_type: 'exact',
+        workspace_name: 'homepage',
+        workspace_commit: '90a173c',
+        plugins_repo_flat: 'false',
+        plugin_directories: [
+          'workspaces/homepage/plugins/homepage',
+          'workspaces/homepage/plugins/dynamic-home-page',
+        ].join('\n'),
+        allow_workspace_addition: 'true',
+        pr_to_update: '',
+        workspace_json: JSON.stringify({ plugins: [] }),
+        force: 'false',
+      }[name];
+    },
+    info() {},
+    warning() {},
+    debug() {},
+    summary: {
+      addHeading() { return this; },
+      addLink() { return this; },
+      addRaw() { return this; },
+      async write() {},
+    },
+  };
+  const github = {
+    async graphql(query) {
+      if (query.includes('query PluginDirectories')) {
+        return { repository: { directory0: { oid: 'present' }, directory1: null } };
+      }
+      return {
+        repository: {
+          pluginsList: { text: 'plugins/homepage:\n' },
+          sourceJson: {
+            text: JSON.stringify({
+              repo: 'https://github.com/redhat-developer/rhdh-plugins',
+              'repo-ref': 'old-commit',
+              'repo-flat': false,
+            }),
+          },
+          backstageJson: null,
+          metadataTree: { entries: [] },
+        },
+      };
+    },
+    rest: {
+      pulls: {
+        async list() { return { status: 200, data: [] }; },
+        async create() { return { data: { html_url: 'https://example.test/pr/1' } }; },
+      },
+      repos: {
+        async compareCommits() { return { data: { status: 'ahead', html_url: 'https://example.test/compare' } }; },
+        async listCommits() { return { data: [{ sha: 'base', commit: { tree: { sha: 'tree' } } }] }; },
+      },
+      git: {
+        async getRef() { const error = new Error('missing'); error.status = 404; throw error; },
+        async createTree(options) { createdTree = options; return { data: { sha: 'new-tree' } }; },
+        async createCommit() { return { data: { sha: 'new-commit' } }; },
+        async createRef() {},
+      },
+    },
+  };
+
+  await updateOverlay({ github, context: {}, core });
+
+  const pluginsList = createdTree.tree.find(entry => entry.path.endsWith('plugins-list.yaml'));
+  assert.equal(pluginsList.content, 'plugins/homepage:\n');
+});
diff --git a/update-overlay/package.json b/update-overlay/package.json
index 65bade2..b974197 100644
--- a/update-overlay/package.json
+++ b/update-overlay/package.json
@@ -2,6 +2,9 @@
   "name": "update-overlay",
   "version": "1.0.0",
   "private": true,
+  "scripts": {
+    "test": "node --test"
+  },
   "dependencies": {
     "yaml": "^2.8.0"
   }