The singer, who took a step back from the charts two years ago, was spotted writing new material at RAK Studios in St John's Wood last week.
Allen wants to record a third album there later this year and the LP could be released as early as next year, the Daily Star Sunday reports.
"Lily has been in the studio trying different sounds and writing new tracks. She's not at a stage where she can start recording but the new album is definitely under way and there's a chance it could be released early next year," a source said.
"When Lily retired she honestly thought she'd never record again. But she started writing for the new Bridget Jones musical and that gave her the bug back."
Allen has launched her own record company and the Lucy In Disguise fashion label while on a break from her recording career.
The 'Smile' star, who won two Ivor Novello Awards for her single 'The Fear' in 2010, has also married Sam Cooper and given birth to daughter Ethel Mary.
"Her life has changed so much since her last album and she now has a different perspective. Lily wants a more mature sound and is penning tracks about Ethel and Sam," the source added.
Allen had previously suggested that she would return to music as a country artist under her married name Lily Rose Cooper. Her last album was 2009's It's Not Me, It's You.
> Lily Allen: 'I never said I was retiring'
Watch the video for Allen's 'Not Fair' below: