The Scot, who joined from Dundee United in January 2012, is yet to make a first-team appearance for Albion and has spent time at MK Dons and Portsmouth in the past 18 months.
And West Brom's sporting and technical director Richard Garlick believes a third loan spell will benefit the 21-year-old.
Garlick told the club website: "Competition for places in our midfield is fierce and Scott has found first-team chances extremely limited.
"At this stage of his career, he needs regular football to aid his development and we wish him all the best at Birmingham."
Birmingham boss Lee Clark, meanwhile, sees Allan as a replacement for Ravel Morrison, the West ham midfielder who was on loan at St Andrew's last season.
Clark told the City website: "Scott has been on our radar for some time and is a very talented player.
"He can go past people and he can make a goal and score a goal. He also likes to get on the ball and make things happen. He can play in a wide area, but I'm predominantly bringing him in to be that attacking midfield player in behind the strikers.
"It's been common knowledge that I've been looking for this type of player - a Ravel Morrison-type midfield player.
"Obviously we've tried to bring Ravel back from West Ham but the indications are that after doing so well with us, he's carried that on in the pre-season with West Ham."