The house builder said the money would cover improvement works on more than 200 blocks of flats built over the past 20 years.
Thousands of leaseholders have received eye-watering bills for cladding removal and other fire safety defects discovered after the Grenfell Tower fire in 2017.
Many flat owners have considered bankruptcy after MPs refused to back amendments to the Fire Safety Bill which would protect them from the extortionate costs.
About 1 million flats in England are thought to be unmortgageable due to cladding issues.
Taylor Wimpey, which is currently being investigated by the Competition and Markets Authority (CMA) over the mis-selling of leasehold houses, said its key priority was “doing the right thing for our customers”.
The £125m fund will support fire safety improvement works for leaseholders in Taylor Wimpey apartment buildings, including those below 18 metres, to ensure they meet current Royal Institution of Chartered Surveyors (RICS) EWS1 guidance.
Taylor Wimpey said in a statement: “This is a complex and exceptional situation, but Taylor Wimpey is focused on doing the right thing for its customers.
“The board has determined that we will fund and oversee the improvement works of apartment buildings in our ownership, regardless of eligibility for the UK Government Building Safety Fund, to make them safe and mortgageable by achieving EWS1 certification.”
But not every block built by Taylor Wimpey will benefit from the cash. Where Taylor Wimpey does not own the building anymore, it will only “contribute funding” dependent on plans put forward by freeholders.
The statement said: “If Taylor Wimpey no longer owns the building and it is not eligible for the Building Safety Fund, or similar support that may be announced in the future, where a freeholder produces a fair and proportionate plan for fire safety improvement works following EWS1 assessment, we will contribute funding to bring those buildings up to the standards required by current RICS EWS1 guidance.
“While the legal responsibility continues to rest with the building owner, we will also provide advice and other assistance where appropriate.”
In a tweet, housing secretary Robert Jenrick praised the move by Taylor Wimpey and urged other developers to “step up and help protect leaseholders from these costs.”
But Liam Spender, a lawyer specialising in cladding issues, was not impressed and tweeted: “Congratulating TW for belatedly putting up less than 1% of the estimated £15bn cost with all manner of strings attached speaks volumes, as does the fact TW expects defects at some of its buildings to be paid for exclusively by the taxpayer.”