The 31-year-old made more than 150 appearances for Dale before departing in 2017 to join Burton Albion. He subsequently moved to Coventry in 2019, spending seven seasons with the Sky Blues and making 200 appearances.
Allen was part of two promotion-winning sides during his time at Coventry City, helping the club rise through the divisions and reach the Championship play-off final in 2023. His final appearance came in the club's last league fixture of the 2025-26 campaign, before his contract expired in the summer.
He had been training with Rochdale during pre-season, having contacted the club to maintain his fitness while considering his next move. The opportunity to return has now resulted in a deal with Ian Watson's side.
"I always thought I'd come back some day," Allen told Rochdale's official website.
"The club has been a huge part of my life. It's been a weird summer for me. I reached out to Rochdale in pre-season to train and keep fit, which I've enjoyed.
"I've got a good relationship with the gaffer. I appreciate what he's done for me and thankful that I've got a deal at the end of it."
Allen's return brings an experienced Football League midfielder back into the squad, with his career taking in spells in both League One and the Championship since his first departure from the Crown Oil Arena.
His time at Coventry included the club's promotion from League One in 2020 and another successful campaign in 2025-26. He also played a part in their run to the Championship play-off final three years earlier, although they were beaten by Luton Town at Wembley.
For Rochdale, the signing reunites the club with a player who came through its youth system and established himself in the first team before moving on to Burton.
Allen now has the opportunity to add another chapter to that relationship as Watson strengthens his squad for the League Two campaign.