The number of Church of England bishops who sit as peers in the House of Lords should be cut to make way for leaders of other faiths, according to a landmark report.
The Commission on Religion and Belief in Public Life (Corab) also recommended that major national and civil events, including coronation ceremonies, should have a more "pluralist character" to reflect a shift in religious beliefs in British society.
Britons of all faiths and none needed a "new settlement" in public policy because the national picture had "transformed beyond recognition", the report's authors said.
Among the "striking" trends, the report said, was a rise in the number of people who identified as non-religious - now amounting to almost half the UK population.
But Baroness Butler-Sloss, who chaired the commission, said issues such as the Paris terrorist attacks and the banning of a Church of England advert in cinemas showed religious beliefs are still central to society.
She said: "From recent events in France, to the schools so many of our children attend and even the adverts screened in cinemas, for good and ill religion and belief impacts directly on all our daily lives.
"The proposals in this report amount to a 'new settlement for religion and belief in the UK', intended to provide space and a role for all within society, regardless of their beliefs or absence of them."
The report also said there had been a "general decline" in Christian affiliation - with two in five people now identifying as such - coupled with a move away from mainstream denominations to evangelical and Pentecostal churches.
Islam, Hinduism and Sikhism have also overtaken Judaism as the largest non-Christian faiths in Britain.
The report's main recommendation follows calls for reform to the House of Lords to allow for representation of other faiths.
Under current rules, the Archbishops of Canterbury and York and the Bishops of Durham, London and Winchester automatically take seats in the Lords. There are 21 further seats for bishops, based on length of service.
Among the report's other recommendations is a reduction in the percentage of faith schools admissions based on a pupil's religion and a re-focus of anti-terror legislation to promote freedom of speech instead of limit it.
And the authors said the relationship between the media and religious institutions was one of "mutual suspicion, indeed at times antagonism", leading them to recommend a new Independent Press Standards Organisation panel to handle religious complaints and that coverage of religious issues should be enshrined in the new BBC charter.
Dr Ed Kessler, Corab vice-chairman and director of the Cambridge-based Woolf Institute, which established the commission, said: "Society has changed beyond all recognition in two generations, but policy-making in this area has been piecemeal and haphazard.
"Public policy needs, as a matter of urgency, to be overhauled to be much more pluralistic and much more welcoming of difference."
But the National Secular Society said the commission's call for Lords reform was "wholly misguided".
Executive director Keith Porteous Wood said: "Disestablishing the Church of England should be a minimum ambition for a modern Britain in the 21st century.
"This report promotes a multi-faith approach to public life which is completely at odds with the religious indifference that permeates British society.
"Efforts to promote religion and belief across public life in schools, in the House of Lords, national occasions and through taxpayer-funded chaplaincy, all serve to marginalise the religiously indifferent who support the freedom to believe and worship, but would like also to be left free from religious interference in their own day-to-day lives.
"What we have at the moment is a secularised country, but one still dominated by a disproportionate level of religious influence. This report would see that interference strengthened at all levels of society."
A spokesman for the Church of England said: "We welcome the call in this report for greater religious literacy and the highlighting of the scale of social action by the Church – as well as its recommendation that where a religious organisation is best placed to deliver a social good, it should not be disadvantaged.
"We also welcome the acknowledgement that the establishment of the Church of England has helped the integration of non-Christian perspectives in British society and helped them to make their voices heard in the public sphere. The Church of England, through its dioceses, parishes and at national level has been at the forefront of work to increase understanding between the different faiths.
"We are however disappointed that the report misunderstands the role of Church of England schools in providing a rounded education to more than a million pupils from all backgrounds as part of our commitment to the common good. If there is a significant problem with our schools it is that many of them are so popular that they are oversubscribed and not every parent who wants to can send their children to one.
"The report also misunderstands collective worship in schools. We believe that if the law on collective worship were repealed schools would risk losing this vital element of shaping a community that reflects the full breadth of human experience. We know, for example, that the response of many schools to the horror of the Paris attacks will have been in the context of collective worship.
"The report is dominated by the old fashioned view that traditional religion is declining in importance and that non-adherence to a religion is the same as humanism or secularism.
"In a fortnight where we have seen overwhelming public support for the Church of England over the Lord's Prayer cinema advert, it is important to remember that most public opinion is strongly opposed to the marginalisation of Christianity."