The former Everton midfielder, now 27, will leave the Blades after three years at Bramall Lane.
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A Sheffield United statement read: "Tom Davies will be leaving the club at the end of the 2025/26 season having spent three seasons with the club.
"Davies, 27, was signed by Paul Heckingbottom following United's promotion to the Premier League in the summer 2023.
"Davies has been a popular member of the squad and in addition to his on-field contribution, he has been a keen advocate of the club and Community Foundation's efforts in the battle against mental health issues.
"Boss Chris Wilder and officials at Sheffield United thank Tom for his service and wish him well for the future."