Details I remember – story is about a boy who goes into the woods and notices an abandoned cottage is now occupied. He meets a mischievous girl and they form a friendship, then finds out she’s a witch. At some point I believe she makes the mayor of his town dance around, and they go to a fair where she changes into a cat to accompany him undetected. At the ends she starts to lose her powers because she starts to care for him (so her nose grows warm, it had always been icy cold), so she leaves. The very end is the boy all grown up, now the mayor of his town, and he often looks to the forest hoping to see puffs of smoke from the little cottage.
The book had a lots of line drawings similar to Roald Dahl’s but smaller.
As a follow up – I was born in 1982, and remember reading this late 80s (I was way ahead of my class in reading).
I also vaguely remember the border of the cover being orange, and for some reason want to say it was kind of gingham-y patterned.
A Reddit user helped me find it – it’s called the Second Witch, by Jack Sendak.