Federated Learning with client-level differential privacy (DP) provides a promising framework for collaboratively training models while rigorously protecting clients' privacy. However, classic approaches like DP-FedAvg struggle when clients have heterogeneous privacy requirements, as they must uniformly enforce the strictest privacy level across all clients, leading to excessive DP noise and significant degradation in model utility. Existing methods to improve the model utility in such heterogeneous privacy settings often assume a trusted server and are largely heuristic, resulting in suboptimal performance and lacking strong theoretical foundations. In this work, we address these challenges under a practical attack model where both clients and the server are honest-but-curious. We propose GDPFed, which partitions clients into groups based on their privacy budgets and achieves client-level DP within each group to reduce the privacy budget waste and hence improve the model utility. Based on the privacy and convergence analysis of GDPFed, we find that the magnitude of DP noise depends on both model dimensionality and the per-group client sampling ratios. To further improve the performance of GDPFed, we introduce GDPFed$^+$, which integrates model sparsification to eliminate unnecessary noise and optimizes per-group client sampling ratios to minimize convergence error. Extensive empirical evaluations on multiple benchmark datasets demonstrate the effectiveness of GDPFed$^+$, showing substantial performance gains compared with state-of-the-art methods.