I was trying to update my macOS on my Macbook from Catalina to Big Sur and got the above message when starting the installation and Selecting the Macintosh HD.
I had just 20 GB space available when I started the installation.
I had to free up more space from my SSD hard-disk which is 256 GB. I cleared around 40 GB of space and tried the installation and the not enough free space message went away!
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