I ended up saving my plex data folder and then copying it to a new VM with a fresh copy of dietPi and I was still having the same transcoding problem as before. I then tried changing the folder owner to the /tmp folder where the transcoding files lives to the plex user and still no joy. Finally I just tried the plex reinstall command thinking all of my settings would be wiped but it wasnt and now everything is working!
In the future to do the update without breaking anything, should I just do the reinstall command again?
dietpi-software reinstall 42