How can I update my 8g ipod touch from 4.2.1 to something higher?

I have an 8G ipod touch with ios 4.2.1 which won't allow me to download most apps.

I want to update it to a higher ios but when in itunes, when I click on the check for updates, it just idicates that the ios 4.2.1 version is already on the ipod.

How can I update the ipod?