He was born in Norwich, Norfolk, England on 7 November 1765, the only child of William Taylor (died 1819), a wealthy Norwich merchant with European trade connections, by his wife Sarah (died 1811), second daughter of John Wright of Diss, Norfolk. William Taylor was taught Latin, French and Dutch by John Bruckner, pastor of the French and Dutch Protestant churches in Norwich, in preparation for continuing his father's continental trading in textiles. In 1774 he was transferred to Palgrave Academy, Suffolk, by Rochemont Barbauld, whose wife Anna Letitia Barbauld Taylor regarded as a strong influence. For three years his school companion was Frank Sayers, who was to be a lifelong friend.
In August 1779 his father took him from school. During the next three years he spent much of his time abroad. Firstly he visited the Netherlands, France, and Italy, learning languages and business methods. In 1781, he left home again, and spent a year in Detmold, staying with an Alsatian Protestant pastor called Roederer, and absorbing German literature under the influence of
Lorenz Benzler . Roederer gave him introductions to August Ludwig von Schlözer the historian at Göttingen, and to Goethe at Weimar. After further German travels he returned to Norwich on 17 November 1782.