The Chancellor had little good news to hand out in his austerity Budget, but one group that will be celebrating this week are the 18 million people who hold Isas.

Alistair Darling is raising the amount that can be put into these tax-privileged accounts from £7,200 to £10,200 next April. Those aged 50 or over will enjoy the bonus of being able to benefit from the raised limit in the current tax year.

The new limits mean that individuals will be able to invest up to £10,200 in a stocks-and-shares Isa, or up to £5,100 in a cash Isa, with the remainder going into a stocks-and-shares Isa. Apart from the new limits, the rules remain the same (see panel, right).

The investment industry welcomed the Chancellor's move, but said that it was long overdue. Since Isas were launched in 1999 the investment limit has been raised only marginally, from £7,000 to £7,200. If the limit had been increased in line with average earnings, it would now stand at £10,500.

Financial experts have also criticised the Treasury's failure to relax the rules that maintain a division between cash Isas and stocks-and-shares Isas. At the moment, savers can put only half their annual Isa allowance in a cash Isa, which penalises those who want to build a large cash nest egg but are nervous of the stock market.

Another unwelcome restriction is that while Isa savers can transfer money from a cash Isa to a stocks-and-shares Isa, they are not allowed to transfer money in the opposite direction - from a stocks-and-shares Isa to a cash Isa.

The decision to restrict the benefit of the new limit to those aged 50 or over in the current tax year has also come under fire. Critics say that it will lead to unnecessary complications and that all savers, both young and old, deserve to benefit from an immediate boost to this tax break.

A Revenue spokesman said that older investors will be able to take advantage of the new £10,200 limit from October 6. Investors will have to be aged 50 or over on the day that they make the investment.

The spokesman added: “Isa managers will need to be satisfied that those seeking to benefit from the higher limit in this tax year are of qualifying age. That should not be a problem for regular Isa investors because they will already have had to give their date of birth. But new Isa investors will have to provide details and, where required, evidence of their date of birth.”

So how should investors use their increased Isa limit? Times Money invited three financial experts to explain what they would recommend for a medium-risk investor who has some experience of putting money in Isas.

Kevin Mountford, Moneysupermarket.com

“I would start from the principle that cash is king, so my first move would be to put the maximum permissible amount - £5,100 - in a cash Isa. I do not rule out using some of the stocks-and-shares allowance as well, but that would depend on the level of risk that the individual was prepared to tolerate. For many people, equity investment is a step too far.

“Even though interest rates have come down dramatically in recent months, it is still possible to obtain rates of 3.5 per cent, or more, on cash Isas. Since the interest is tax-free, this is the equivalent of 4.38 per cent for basic-rate taxpayers and 5.84 per cent for higher-rate taxpayers.

“Among the most attractive deals on offer is the Barclays Golden Isa, which pays 3.61 per cent, though that includes a bonus of one percentage point, which falls away after 12 months. The RBS Group's Cash ISA Plus pays 3.51 per cent, though there are some strings attached.

“These are both variable rates and could move lower. Those who prefer the security of a fixed rate could opt for the Leeds Building Society 1 Year Fixed Rate Isa, at 3.05 per cent.”

Brian Dennehy, Dennehy Weller & Co

“We believe that Isas should be used as long-term investment vehicles and that equities are the best asset for achieving good long-term returns. So we would recommend putting all the money into a stocks-and-shares Isa.

“We think that people should now be concentrating on investments that produce quite high levels of income, whether they intend to take the income or reinvest it to boost total returns. This would point to bond funds and equity-income funds.

“For the more cautious bond fund investor there is the M&G Corporate Bond fund, which is very defensively run and yields about 5.5 per cent. Slightly higher up the risk scale are funds such as the New Star Sterling Bond fund, which has a higher yield of 8.5 per cent and greater exposure to bank bonds.

“Among equity-income funds, we like Newton Higher Income, which is well managed and is a genuine income fund that buys only stocks yielding more than the index average. It has a yield of about 6.5 per cent. There are plenty of good high-yielding stocks on the Continent, so another option would be the Ignis Argonaut European Income Fund, which contains a lot of solid multinational stocks and offers a yield of about 6.5 per cent.”

Dennis Hall, Yellowtail Financial Planning

“The amount of money that the Chancellor is having to borrow through government bonds is so large that it is likely to trigger inflation in the coming years. This means that cash is dead in the water because the capital value of cash deposits will be eroded by inflation.

“I would put the entire £10,200 limit into a stocks-and-shares Isa, and the money would go into equities rather than bonds, which, like cash, tend to be adversely affected by inflation.

“For those who do not like paying high management charges, I would suggest the Legal & General International Index Trust. It offers a broad spread of cover across countries and industry sectors, and has an annual charge of 0.8 per cent, against at least 1.5 per cent for most actively managed funds.

“For those who do not mind paying higher charges for good fund management, I would suggest the Jupiter Merlin Worldwide Portfolio fund. Again, it covers a wide spread of both developed and emerging markets, and the performance of John ChatfeildRoberts, the manager, has been consistently good.”

The new Isa rules

You can invest a total of £10,200 each tax year in an individual savings account (Isa).

The entire £10,200 can be put into a stocks-and-shares Isa. Alternatively, you can place up to £5,100 in a cash Isa, with the rest available to go in a stocks-and-shares Isa.

All capital gains made within an Isa are tax-free, as is all interest on cash Isas. Investors in bond funds suffer no income tax on interest payments because they are able to claim back the 20 per cent tax deducted at source.

Revenue has tax dodgers in its sights

What the Chancellor gives with one hand he takes with the other. In the same Budget speech that he promised higher annual limits on Isa investments, Alistair Darling announced that he would be closing the net tighter around tax dodgers.

His most eye-catching measure is the pledge to “name and shame” serious tax defaulters. The Revenue is planning to publish the names of individuals and companies that incur a penalty because they have deliberately sought to evade paying more than £25,000 of tax due.

The identification of tax dodgers will be pretty comprehensive, says Sue Holmes, head of tax investigations at Smith & Williamson, the accountant. She says: “The planned legislation will allow the Revenue to publish the names, addresses, trade, profession or sector of the offender. The amounts of duties evaded and the period covered will also be published and the details will remain on the Revenue's website for 12 months.”

Meanwhile, the Chancellor has put a further squeeze on holders of undeclared offshore accounts. The Revenue is introducing a new disclosure opportunity (NDO) until March 2010. Those with money in offshore accounts will have until then to inform the Revenue if they have unpaid tax or duties and to settle any tax bills.

The latest initiative follows the offshore disclosure facility (ODF) in 2007, when 45,000 people came forward to give the Revenue details of their non-UK savings. It promised less harsh penalties for those who volunteered information. By agreeing to levy a penalty of only 10 per cent on top of the tax and interest due, the Revenue succeeded in collecting £400million through the ODF.

This time the penalty is likely to be stiffer but Chris Oates, tax investigations partner at Ernst & Young, another accountant, says that those with undeclared offshore accounts should reveal them now. “The NDO will be the last-chance saloon for all tax evaders to make a disclosure and settle on a financial basis with the Revenue. It is an offer that should not be refused,” he says.

Case study

Justin Baring, above, will be making use of his increased Isa limit, but he will have to wait until next April to do so because he is only 37. Mr Baring, a stockbroker from Overton, Hampshire, is a big fan of equity funds and will be putting several in his Isa.

Mr Baring started a fund of his own recently - the Red Fort Fund, which invests in basic materials - but it is not yet eligible for Isa investment. Instead, he will be adding to his holding in BlackRock Gold & General Fund, which is one of the top performers across all sectors over the past ten years.

“I also like the look of M&G Recovery Fund,” he says. “Tom Dobell, the manager, has what I consider to be a very simple but sensible approach - he aims to buy low and sell high.”

He also favours BlackRock UK Dynamic Fund, saying: “It had a poor spell last year, but I rate the stockpicking skills of Mark Lyttleton, the manager.”