Schuster was the son of a Frankfurt textile merchant and banker who, unwilling to remain in the city after its annexation by Prussia in the wake of the 1866 war, moved with his family to Manchester, England. Schuster became a British citizen in 1875 and studied physics at Owens College, Manchester, and the University of Heidelberg where he obtained his doctorate in 1873. Schuster then spent the period 1875–81 at the Cavendish Laboratory, Cambridge, but returned to Manchester to serve first as professor of applied mathematics and from 1889 to 1907 as professor of physics. His somewhat premature retirement at the age of 56 was spent on his own research and the formation of the International Research Council, which he served as first secretary from 1919 to 1928.

Initially Schuster worked as a spectroscopist. In 1881 he refuted the speculation of George Stoney that spectral lines could be regarded as the harmonics of a fundamental vibration. This was done by a statistical analysis of the spectral lines of five elements in which he showed their random distribution. Somewhat discouraged by this result he turned to the study of the passage of an electric current through a gas.

In the 1880s he was the first to show that an electric current is conducted by ions. He went on to propose how the ratio between the charge and the mass of cathode rays could be calculated and in fact described the technique later used by J. J. Thomson in his determination of the charge on the electron. He further proposed, in 1896, that the new x-rays of Wilhelm Röntgen were in fact transverse vibrations of the ether of very small wavelength.