But Δx needn't be zero. Or should it be? Should the time difference in S be taken on the same clock? Why not any two clocks in any two locations x1 and x2?
The time difference that is measured on a clock at the same location is called the proper time. This will be the smallest measured time difference of any observer.
If you choose to assume that $\Delta x = 0$ (or rather, you choose to considerer two events A and B at the same location in S) then in the S frame the clock measuring the time between the events is stationary (i.e., the events occur at the same location in S) and $\Delta t$ is the proper time.
This time $\Delta t$ will be less than that measured by a moving observer. But, don't forget that in this case the moving observer is in the S' frame and is moving at velocity $v$ as measured in the S frame.
In this case, indeed you will have $\Delta t' = \gamma \Delta t$, such that $\Delta t'$ is bigger than $\Delta t$.
However, note that the location of the moving observer in the S' frame in this case can not be the same as the location of the measured events we are discussing above, since the observer is moving in this frame and the measured event is at the same location in this frame.
however... which says that the time on the moving clock is less than on the stationary one.
If you want to consider the moving observer to be measuring the proper time interval between events, you can do that too, but in this case you will not have $\Delta x = 0$ and $\Delta t$ will not be the proper time. Now $\Delta t$ and $\Delta x$ are referring to the difference between different events than the events discussed above. The events will necessarily be different than the events discussed above. We should probably use labels like $\Delta t_{A,B}$ and $\Delta t_{C,D}$ to differentiate between the time difference between events A and B (the ones considered above) and the time difference between events C and D (the ones considered here). We usually don't do all this extra labeling though.
For example, if the S frame is fixed on earth and the S' frame is in a spaceship moving away from earth, then if we consider measurements of events C and D that occur at the same location in the spaceship, then $\Delta x'=0$ and it is $\Delta t'$ that is the proper time not $\Delta t$.
In this case, indeed, you will have $\Delta t = \Delta t' \gamma$ such that $\Delta t$ is bigger than $\Delta t'$.
This could seem quite confusing if we don't include the extra labels, but with the extra labels is it probably more clear:
$$
\Delta t'_{A,B} = \gamma \Delta t_{A,B}
$$
$$
\Delta t_{C,D} = \gamma \Delta t'_{C,D}
$$
The events A and B are measured at the same location in frame S. The events C and D are measured at the same location in frame S'.
Update based on comments:
There is no reason why either the observer in S or the observer in S' necessarily has to measure the proper time. Indeed, the events could be spatially seperated in both frames. In this case just fall back to the general Lorenz transformation equations for the differences:
$$
c\Delta t' = \gamma c\Delta t - \beta \gamma \Delta x
$$
$$
\Delta x' = -\beta\gamma c\Delta t + \gamma \Delta x\;.
$$
For example, suppose that the relative velocity between S and S' is v = 200m/s and the origins coincide at time zero. And suppose further that, in S, event E is at time $t_E= 0$ seconds and location $x_E = 0$ meters and event F is at time $t_F = 1$ second and location $x_F = 100$ meters. These events can also be seen to be spatially separated in S' and neither S or S' measures the proper time.
In S' Event E also occurs at $t'_E=0$ and $x'_E=0$ and we have
$$
ct'_F = \gamma c t_f - \beta \gamma x_F = \gamma c 1s - \beta \gamma 100m
$$
and
$$
x'_F = \gamma x_f - \beta \gamma c t_F = \gamma 100m - \beta \gamma c 1s
$$
Or
$$
t'_F = \gamma (1 - \frac{200}{300000000} 100/300000000) = \gamma (1 - \frac{1}{4500000000000})\quad \text{seconds}
$$
and
$$
x'_F = -\gamma 100 \quad \text{meters}\;,
$$
where I have approximated $c = 300000000m/s$ and where, in this case, $\gamma$ is approximately 1.0000000000002.