iOS and iPadOS 15 and watchOS 8 beta users found that, in the most recent update, the amount of free space needed for installation had been reduced. According to Apple’s release notes for both the iOS and iPadOS 15 and watchOS 8 betas, “You can now update your device using Software Update if less than 500 MB of storage is available.”
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Apple doesn’t state a reason for easing up on the storage requirements, but MacRumors suggests that it might be in service to Apple Watch Series 3 users. Due to the older device’s limited storage, users often would have to reset and repair their watch in order to update the OS.