What does "don't group pinned items together at all" mean? The help file describes the option in more details, and provides an example.

From the help file:

Don't group pinned items
Every pinned item has an Application ID, just like the taskbar buttons. By default, when a taskbar button with the same Application ID as the pinned item is created, it replaces the pinned item. This option makes the taskbar button show up at the end of the taskbar, while the pinned item stays untouched

For example, you have a pinned item of Notepad:

By default, when you create a Notepad window, you get:

With this option set, you get:

Note
It's possible to control pinned item grouping per Application ID using Taskbar Inspector.

How is that different to what happens with the "Don't group pinned items" option?

Basically, the option to reduce the gap between pinned items uses the following hack:
The taskbar has four types of items: 1 – regular, 2 – pinned, 3 – combined, 4 – temporary.
The temporary type is used for an invisible item which serves as a placeholder when an item is about to be pinned.

The tweaker hooks the function which calculates the sizes and positions of the items, and temporary replaces the type of pinned items from 2 to 4. Explorer considers type 4 to be narrower.

See the following screenshot:

With the hack, the pinned item is as narrow as the invisible placeholder for pinning on the first part of the image.

Since the option doesn't work for you, it might be the case that in your setup (maybe some variant of a tablet mode, or touch screen mode) the temporary item width is as wide as the regular pinned item width. Can you check this?

I assume that's not something that is related to the 7+ Taskbar Tweaker v5.10 update, but to Windows 10 20H2. Do you have a way to reproduce the issue without a Surface?

I'm sorry, but I don't quite understand what you mean. Please post images or a video to better explain what you mean.

If I understand correctly, the option you're looking for is "Don't group pinned items". Please let me know if you meant something else.

Did you try version 5.10?

Closing due to a lack of feedback. Feel free to leave a comment if there's still a problem.

I assume that it's not a bug of the tweaker, but a Windows bug. Changed from "bug" to "idea".