Around half of the £390 billion of the UK’s Isa holdings are in stocks and shares, but only UK main market stocks have previously been eligible.

Now smaller exchanges including AIM are to be allowed, once legal changes are completed by the autumn.

Chancellor George Osborne launched a consultation on the proposal earlier this year, and in the Budget he also announced the scrapping of stamp duty on AIM share purchases from April 2014.

Research by Barclays Stockbrokers subsequently found one in four Isa investors saying they would definitely invest in AIM stocks.

The Government said: “This change should benefit SMEs with shares quoted on markets that do not currently qualify for Isas.

“For example, more than 1000 companies listed on the AIM will now be eligible for direct Isa investment.

“At a time when many SMEs are looking for alternative types of finance, this change could provide a major capital injection for SME equity markets and encourage investment in growing businesses.”

Certain property and investment-related stocks will be excluded.