Tougher sentences for banned drivers who cause death on the roads and a new offence of causing serious injury while disqualified are to be introduced.
A disqualified driver who causes death will face a prison sentence of up to 10 years, instead of two years.
The government said it was bringing in the changes after listening to concerns raised by victims' families.
The changes are expected to come into force in early 2015.
This will include those offences caused by uninsured and unlicensed drivers.
Justice Secretary Mr Grayling said: "I want to make our roads safer and ensure people who cause harm face tough penalties.
"Disqualified drivers should not be on our roads for good reason. Those who choose to defy a ban imposed by a court and go on to destroy innocent lives must face serious consequences for the terrible impact of their actions.
Labour has raised concerns that there are already issues with space in prisons.
Shadow justice secretary Sadiq Khan said: "The government also needs to assure the public that they have enough space in prison to cope with the increased demand.
"The current shortage of space and increased overcrowding on their watch has led to serious problems in our prisons."
The government said it planned to change the law shortly, which will apply in England, Scotland and Wales.
There is a separate framework of road traffic offences in Northern Ireland.
About 8,200 people were convicted for driving while disqualified in 2012, according to Ministry of Justice figures. There were 16 prosecutions and 13 convictions for causing death by driving when disqualified, unlicensed or uninsured.