The film, The Hunt For Tony Blair, imagines that the former Prime Minister Tony Blair is wanted for his part in the Iraq War.
Saunders has signed up for the role of Thatcher and is expected to play the politician as a "Norma Desmond/Baby Jane character from a Hollywood movie".
In The Hunt for Tony Blair, Thatcher attempts to seduce Blair (Stephen Mangan) while he is on the run from the police.
The episode, which has been shot in black and white and is said to be a pastiche of film noir, also stars Robbie Coltrane and The Inbetweeners' James Buckley as the policemen hunting for Blair.
Other cast members include Nigel Planer, Harry Enfield, Rik Mayall, John Sessions, Ross Noble, Catherine Shepherd, Morgana Robinson and Ford Kiernan.
The Hunt for Tony Blair, which will premiere at the MediaGuardian Edinburgh International Television Festival this weekend, will air on Channel 4 in October.