The Scotland Under-21 international started his career with Dundee United before joining the Baggies for an undisclosed fee in January 2012.
Allan has not yet made a first-team appearance for Albion but has enjoyed loan spells with Portsmouth, twice, and MK Dons over the last 18 months.
And with West Brom boss Steve Clarke keen to give him more experience away from The Hawthorns, Blues boss Lee Clark has made a move for a player he sees as filling a similar role to that which Ravel Morrison performed on loan at St Andrew's last term.
"Scott has been on our radar for some time and is a very talented player," Clark told the club's official website.
"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 and he's impressed the manager and the coaches there, so they weren't in a rush to make a decision."
Allan becomes the third player to join Birmingham on a season-long loan deal following Swansea's Kyle Bartley and fellow defender Dan Burn, from Fulham.