The former Portsmouth, West Ham and Bolton left-sided player, 39, joins from Tottenham Hotspur's youth set-up.
Taylor – who will be assisted by former Blackpool manager Neil McDonald, the new first-team coach – had a brief spell as Swindon town's interim boss in 2018, but this is his first permanent position as a head coach or manager.
“I’m very happy to join the club,” he said. “As with a lot of things in football, they move fast and this is no exception.
“I’m extremely honoured to be given the opportunity to be head coach of Walsall and I’m really excited. In football and life, a lot of it is about timing and in my opinion it’s very good timing.
“The club, the owner and the technical director want the opportunity to bring success back to Walsall Football Club and I hope I can be part of that.
“Winning football matches is never easy but what I’ve learnt in the last two years gives me an opportunity to build a style of play that the fans resonate with and enjoy watching, with the aim of delivering positive results on the pitch.
“It’s about building an identity of what we are and that the football team on the pitch replicates this on the pitch. One thing I can guarantee to all the supporters is their team will always give 100 per cent on the pitch because as a player, I was always that way and as a coach, I’m always that way and therefore I expect the players to reflect that.”
Saddlers chairman Leigh Pomlett described Taylor as his 'number one target', adding: “Matthew is young, ambitious and successful and I am delighted that we have been able to attract him to leave Tottenham Hotspur to become our head coach.
“I have spent a number of hours talking with Matt in recent days and he meets the profile of the head coach I am seeking for Walsall Football Club.
“Coupled with Neil McDonald and working closely with Jamie Fullarton (technical director), we now have the right set-up to drive the Walsall football agenda forward. I do not want more of the same and I am looking for a significant shake-up of the club and believe this is the right team to do it. I welcome Matthew to the club and look forward to his impact.”
Fullarton was tasked with finding the new head coach, and said: “During a thorough recruitment process undertook, Matthew was our stand-out candidate and was our number one target for the role.
“He has a clear defined vision and detailed plan along with the skill-set and character to drive the club forward in a direction that aligns with the club’s strategy.
“I am really looking forward to working with Matthew, who will no doubt have a major impact and will create a genuine feeling of optimism among everyone involved with the football club for the coming season.”