In a new excerpt from her upcoming memoir 'Love, Pamela', Anderson claims Allen pulled open his robe and exposed himself to her.
But Allen has denied the allegation, saying to Variety: "No, it never happened. I would never do such a thing."
Anderson, who was 23 at the time of the alleged incident, claims she arrived on set on her first day of filming the show back in 1991, when her new co-worker 'introduced himself' by flashing his penis.
Watch: Pamela Anderson alleges Tim Allen flashed her on the set of Home Improvement
She claims Allen said it "made them even" as he had seen her naked in her Playboy shoots.
Anderson added she "laughed uncomfortably" at the time.
Home Improvement followed the story of TV host and DIY expert Tim "The Toolman" Taylor (played by Allen) as he juggled his work/life balance.
Anderson had a recurring role as his co-star Lisa the Tool Time Girl for the first two seasons.
The show ran for over 200 episodes before concluding in 1999, earning seven Primetime Emmys.
Anderson quit the show in 1993, with Lisa written out to "become a paramedic". She would return briefly in 1997 as a guest cameo.
In reality, Anderson opted to leave to pursue her now iconic role of CJ Parker in Baywatch.
The allegation is one of multiple bombshell claims Anderson makes in her new memoir, as well as its sister documentary, Pamela - A Love Story, being released on Netflix.
Over the course of the film, she discusses her much speculated on love life, her career, and the sex tape leak with ex-husband Tommy Lee that derailed her career in 1996.
She also makes a number of allegations - including several incidences of sexual assault starting when she was just a child.
Pamela: A Love Story is released on Netflix on January 31st.