diff --git a/esphome/components/json/json_util.cpp b/esphome/components/json/json_util.cpp
index 9acba76597..2070b312e8 100644
--- a/esphome/components/json/json_util.cpp
+++ b/esphome/components/json/json_util.cpp
@@ -16,16 +16,24 @@ static const char *const TAG = "json";
 static std::vector<char> global_json_build_buffer;  // NOLINT
 
 std::string build_json(const json_build_t &f) {
-  // Here we are allocating as much heap memory as available minus 2kb to be safe
+  // Here we are allocating up to 5kb of memory,
+  // with the heap size minus 2kb to be safe if less than 5kb
   // as we can not have a true dynamic sized document.
   // The excess memory is freed below with `shrinkToFit()`
 #ifdef USE_ESP8266
-  const size_t free_heap = ESP.getMaxFreeBlockSize() - 2048;  // NOLINT(readability-static-accessed-through-instance)
+  const size_t free_heap = ESP.getMaxFreeBlockSize();  // NOLINT(readability-static-accessed-through-instance)
 #elif defined(USE_ESP32)
-  const size_t free_heap = heap_caps_get_largest_free_block(MALLOC_CAP_INTERNAL) - 2048;
+  const size_t free_heap = heap_caps_get_largest_free_block(MALLOC_CAP_INTERNAL);
 #endif
 
-  DynamicJsonDocument json_document(free_heap);
+  const size_t request_size = std::min(free_heap - 2048, (size_t) 5120);
+
+  DynamicJsonDocument json_document(request_size);
+  if (json_document.memoryPool().buffer() == nullptr) {
+    ESP_LOGE(TAG, "Could not allocate memory for JSON document! Requested %u bytes, largest free heap block: %u bytes",
+             request_size, free_heap);
+    return "{}";
+  }
   JsonObject root = json_document.to<JsonObject>();
   f(root);
   json_document.shrinkToFit();
@@ -36,27 +44,45 @@ std::string build_json(const json_build_t &f) {
 }
 
 void parse_json(const std::string &data, const json_parse_t &f) {
-  // Here we are allocating as much heap memory as available minus 2kb to be safe
+  // Here we are allocating 1.5 times the data size,
+  // with the heap size minus 2kb to be safe if less than that
   // as we can not have a true dynamic sized document.
   // The excess memory is freed below with `shrinkToFit()`
 #ifdef USE_ESP8266
-  const size_t free_heap = ESP.getMaxFreeBlockSize() - 2048;  // NOLINT(readability-static-accessed-through-instance)
+  const size_t free_heap = ESP.getMaxFreeBlockSize();  // NOLINT(readability-static-accessed-through-instance)
 #elif defined(USE_ESP32)
-  const size_t free_heap = heap_caps_get_largest_free_block(MALLOC_CAP_INTERNAL) - 2048;
+  const size_t free_heap = heap_caps_get_largest_free_block(MALLOC_CAP_INTERNAL);
 #endif
+  bool pass = false;
+  do {
+    const size_t request_size = std::min(free_heap - 2048, (size_t)(data.size() * 1.5));
 
-  DynamicJsonDocument json_document(free_heap);
-  DeserializationError err = deserializeJson(json_document, data);
-  json_document.shrinkToFit();
+    DynamicJsonDocument json_document(request_size);
+    if (json_document.memoryPool().buffer() == nullptr) {
+      ESP_LOGE(TAG, "Could not allocate memory for JSON document! Requested %u bytes, free heap: %u", request_size,
+               free_heap);
+      return;
+    }
+    DeserializationError err = deserializeJson(json_document, data);
+    json_document.shrinkToFit();
 
-  JsonObject root = json_document.as<JsonObject>();
+    JsonObject root = json_document.as<JsonObject>();
 
-  if (err) {
-    ESP_LOGW(TAG, "Parsing JSON failed.");
-    return;
-  }
-
-  f(root);
+    if (err == DeserializationError::Ok) {
+      pass = true;
+      f(root);
+    } else if (err == DeserializationError::NoMemory) {
+      if (request_size * 2 >= free_heap) {
+        ESP_LOGE(TAG, "Can not allocate more memory for deserialization. Consider making source string smaller");
+        return;
+      }
+      ESP_LOGW(TAG, "Increasing memory allocation.");
+      continue;
+    } else {
+      ESP_LOGE(TAG, "JSON parse error: %s", err.c_str());
+      return;
+    }
+  } while (!pass);
 }
 
 }  // namespace json