Under the proposals an exception will be made for for contactless payments if the vehicle is not moving, and the goods or services are delivered immediately, such as at a drive-through takeaway.
However, in its consultation, the department has not acquiesed to demands for a full ban on hands-free use, meaning functions like satellite navigation will still be allowed if the rules are updated.
Baroness Vere, the roads minister, said: "Our roads are some of the safest in the world, but we want to make sure they're safer still by bringing the law into the 21st century.
"That's why we're looking to strengthen the law to make using a hand-held phone while driving illegal in a wider range of circumstances.
"It's distracting and dangerous, and for too long risky drivers have been able to escape punishment, but this update will mean those doing the wrong thing will face the full force of the law."
The change in law would apply across Britain and is expected to come into effect early next year, pending the outcome of the consultation.
In 2019, there were 637 casualties on Britain's roads - including 18 deaths and 135 serious injuries - in crashes where a driver using a mobile was a contributory factor.
The punishment for motorists caught breaking the rules on hand-held mobile use are six penalty points and a £200 fine.
The RAC welcomed ministers’ plans to close the loophole.
Its head of roads policy, Nicholas Lyes, said: "We know that the use of hand-held mobile phones at the wheel continues to represent a very real road safety risk, so it's clear more needs to be done to make this as socially unacceptable as drink-driving.
"It's important that alongside this change to the law, the government looks seriously at other options that can help enforce the law, which should include new camera technology that can detect different types of hand-held mobile phone use."
Additional reporting by Press Association