The answer to this question is quite broad, from changing opinions and policies on the Empire at home, to growing independence movements across the colonies, mainly in the "Jewel of the Empire", India.

But the largest contributing factor to the fall of the Empire is arguably the Second World War. Despite emerging victorious, the effects of the war were felt keenly both at home and abroad. Britain was essentially bankrupt, with absolvency only avoided in 1946 by a US$4.33 Billion loan from the United States, which was only fully paid back in 2006. With war time rationing still in effect, the British public were more concerned with affairs at home rather than maintaining an Empire which was looking more and more like a net drain on the nations resources. Britain adopted a policy of peaceful disengagement from the majority of their colonies, to dismantle an empire they no longer wanted nor could afford. In 1945 a pro-decolonisation Labour government was elected, which immediately began addressing the most pressing concern of decolonisation, Indian independence. [1][2][3][4]

Indian independence movements had been campaigning for decades by 1945, but didn't really agree on how to go about it. The Indian National Congress believed in a unified Indian secular state, whereas the Muslim League preferred a seperate state for Islamic majority regions. With mounting civil unrest, the risk of civil war and the mutiny of the Royal Indian Navy in 1946, the newly appointed (and last) Viceroy of India, Lord Mountbatten, moved the date of Indepence forrward from 1948 to August 15th 1947.[4] After India had been granted independence it was only a matter of time before all the other colonies that wanted independence would have it.

In 1951 the Suez Canal Crisis highlighted the limitations of Britain to the world, demonstrating that henceforth it could no longer act without at least the acquiescence, if not the full support, of the United States. While British power in the Middle East was weakened, it was not destroyed. Britain continued to operate in the area and station troops until a decade later.[2][5][6]

Wanting to avoid the kind of colonial war being waged by France in Algeria, between the 1950s and the 1980s decolonisation in Africa proceeded rapidly. By the end of the 1960s, all but Rhodesia (the future Zimbabwe) and the South African mandate of South West Africa (Namibia) had achieved recognised independence. In Rhodesia, the 1965 Unilateral Declaration of Independence by the white minority resulted in a civil war that lasted until the Lancaster House Agreement of 1979, which set the terms for recognised independence in 1980, as the new nation of Zimbabwe.[4][7]

Between the 1960s and 1981, all the British colonies in the Mediterranean, Carribean, South America and Pacific Ocean would be granted independence. By 1981 other than a scattering of islands and outposts the process of decolonisation started after the Second World War was largely complete. In 1982 the invasion of the Falkland Islands by Argentina tested Britains military resolve to defend their remaining overseas territories. The resulting victory was viewed by many to have contributed to reversing the downward trend in Britain's status as a world power.[7]

Britain to this day retains sovereignty over fourteen "British Overseas Territories" (as they are officially classified as of 2002), however they are either small (sometimes unmanned) military or scientific outposts, or self-governing islands which rely on Britain for military defense and foreign relations. Some argue that this means "the Sun still hasn't set" on the British Empire, however how much these territories can be classed as an "empire" is debatable.

[1]Abernethy, David (2000). The Dynamics of Global Dominance, European Overseas Empires 1415–1980. Yale University Press. ISBN 0-300-09314-4. Retrieved 22 July 2009.

[2]Brown, Judith (1998). The Twentieth Century, The Oxford History of the British Empire Volume IV. Oxford University Press. ISBN 0-19-924679-3. Retrieved 22 July 2009.

[3]"What's a little debt between friends?". BBC News. 10 May 2006. Retrieved 20 November 2008.

[4]Lloyd, Trevor Owen (1996). The British Empire 1558–1995. Oxford University Press. ISBN 0-19-873134-5. Retrieved 22 July 2009.

[5]Smith, Simon (1998). British Imperialism 1750–1970. Cambridge University Press. ISBN 978-3-12-580640-5. Retrieved 22 July 2009.

[6]Burk, Kathleen (2008). Old World, New World: Great Britain and America from the Beginning. Atlantic Monthly Press. ISBN 0-87113-971-5. Retrieved 22 January 2012.

[7]James, Lawrence (2001). The Rise and Fall of the British Empire. Abacus. ISBN 978-0-312-16985-5. Retrieved 22 July 2009.

As well as the geopolitics of empire leading to its downfall, the social and economic situation within the UK also contributed to the downfall of the empire.

The empire had, at least from the end of World War II but arguably as far back as the Boer Wars, lost much of its public support. As the voting franchise expanded and the labour movement grew, support for the empire fell even further and support for schemes such as public healthcare, social security and pensions became highly sought after. The UK could seldom afford both an empire and the huge military investment that requires, as well as these reforms. A big symbolic indicator of this is how in 1945 the public voted out Churchill - an international statesman and imperialist - and voted in a social-democratic Labour party headed by Atlee. Britain was ready for a change, and is why most historian deal with contemporary British history from 1945 onwards - as it represented a new 'era'.

Its also worth remembering that the process of decolonization is still on-going. Most atlantic and pacific islands are still owned by their former colonial masters, usually because the inhabitants have asked - but its still causes tensions, just look at Gibraltar, Falklands/Malvinas and the British Indian Ocean Territory. Also, Canada and Australia, as well as a few other places, still have the British monarch as their (ceremonial) head of state. Similarly, the old imperial powers (UK, France, Spain, Netherlands) are still seeing their great-power status weakening as former colonies catch up. They are still in a state of geo-political decline that began after the second world war.

I could go through each case but there was one underlying reason why Britain barely tried to keep everything (Although it did keep Hong Kong until 1997), and that was profitability.

It was simply not as profitable for Britain to have an empire, especially following WW2, it kept very close links to many of its former colonies for the next 20 years in trade etc, so the benefits of a formal empire were disappearing rapidly, however it did try to expand the Commonwealth which kept ex-colonies closely tied to Britain, even if not formally.