Taylor, 36, came through the Tranmere Rovers youth-team and made his first-team appearance in 2002, scoring the winning goal in a 2–1 win over Hartlepool United in a League Cup tie.
He has made more than 350 career appearances, featuring for Wigan Athletic, Newcastle United, Hull City, Port Vale and Fleetwood Town.
He also represented England Under-21s on five occasions.
“The move has been on the cards for a few weeks and I’m delighted to join Colne," he said.
"I met with the gaffer and Chris (Kirkland) and after hearing the plans I felt it was the perfect fit for me at this stage of my career. I trained with the lads Thursday and can’t wait to get started now."