Offenders who defy driving bans will be hit with up to 10 years in prison if they cause death and up to four years for serious injuries under the law reforms, which will be introduced next year.
Mr Grayling said the changes would send a clear message to drivers who flout bans and "go on to destroy innocent lives".
The current maximum sentence faced by a driver who causes death while driving when disqualified is two years in jail — and there is no specific offence of causing serious injury while disqualified.
Mr Grayling also announced plans for a full review of all driving offences and penalties, which includes offences committed by uninsured and unlicensed drivers.
It comes after MPs pushed for a change in the law to deal with banned drivers following cases across the country.