Mac Mail 16 on Sequoia 15.4.1 cannot paste images inline

After the Sequoia 15.4.1 update I can no longer paste or drag images into a position in an email - they always go to the bottom.

This makes sending instructions with screenshots impossible unless I write them in Pages or Word or something else and attach that Pages or Word etc file instead.

I have toggled "Edit | Attachments | Always insert attachments at end of message" on and off for no result.

But strangely, by turning "Edit | Attachments | Always send Windows-friendly attachments" OFF, I CAN paste images inline with text ... but they won't be in "Windows-Friendly" format.

Previously this setting was greyed out and permanently set to on.

So how can I ensure my Mac Mail emails are received correctly by Windows users?