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Gascoigne was born in Dunston, Tyne and Wear on 27 May 1967. His father, John (1946-2018), was a hod carrier, and his mother, Carol, worked in a factory. He was named Paul John Gascoigne in tribute to Paul McCartney and John Lennon of the Beatles. He attended Breckenbeds Junior High School, then the Heathfield Senior High School, both in the Low Fell area of Gateshead.

Gascoigne captained Newcastle United's youth team to the FA Youth Cup in the 1984-85 season, and scored twice in the 4-1 victory over Watford in the final at Vicarage Road. Manager Jack Charlton handed Gascoigne his first team debut as a substitute for George Reilly in a 1-0 win over Queens Park Rangers on 13 April 1985 at St James' Park. At the age of 18 Gascoigne signed a two-year PS120 a week contract at Newcastle, with the club also having a further two-year option clause.  Willie McFaul took over as manager for the 1985-86 season, and named Gascoigne in his first eleven from the opening game of the campaign; he took the place of Chris Waddle, who had been sold to Tottenham Hotspur in the summer. He scored his first goal at home to Oxford United in a 3-0 victory on 21 September 1985, and claimed a further eight goals in the 1985-86 campaign. Newcastle finished 11th in the First Division that season and, at the end of it, Gascoigne was featured on the front cover of the Rothmans Football Yearbook.  He scored five goals in 24 league games in the 1986-87 season, as the "Magpies" slipped to 17th place, just three points above the relegation play-offs.  In a 0-0 draw with Wimbledon at Plough Lane hard-man Vinnie Jones singled him out for attention, and in an incident that would become a much-publicised photograph, Jones grabbed him by the genitals as Gascoigne screamed in agony. Gascoigne subsequently sent Jones a red rose, and the two became good friends. He was named as the PFA Young Player of the Year and listed on the PFA Team of the Year in the 1987-88 season, and was the subject of offers from both Manchester United and Tottenham Hotspur. His first choice was Liverpool but with no offer forthcoming, Gascoigne promised Alex Ferguson that he would sign for Manchester United. Ferguson duly went on holiday to Malta, where he received the news that Gascoigne had signed for Spurs, for a record British fee of PS2.2 million. In his 1999 autobiography, Ferguson claimed that Gascoigne was wooed into signing for Tottenham after they bought a house for his impoverished family.
Paul Gascoigne