I have a Python Lambda and since I started using AWS X-Ray the package size has ballooned from 445KB to 9.5MB.

To address this and speed up deployments of my code, I have packaged my requirements separately and added a layer to my template. The documentation suggests that this approach should work.
Packaging dependencies in a layer reduces the size of the deployment package that you upload when you modify your code.
pip install --target ../package/python -r requirements.txt
Resources:
...
ProxyFunction:
Type: AWS::Serverless::Function
Properties:
Architectures:
- x86_64
CodeUri: proxy/
Handler: app.lambda_handler
Layers:
- !Ref ProxyFunctionLibraries
Role: !GetAtt ProxyFunctionRole.Arn
Runtime: python3.8
Tracing: Active
ProxyFunctionLibraries:
Type: AWS::Serverless::LayerVersion
Properties:
LayerName: proxy-function-lib
Description: Dependencies for the ProxyFunction.
ContentUri: package/.
CompatibleRuntimes:
- python3.8
However, this doesn't seem to have prevented the Lambda from still packaging everything in the top layer, and every time I deploy the package is still 9.5MB. The new layer for some reason is 11MB in size, but that is only being deployed when a change is made.
How can I reduce the size of the Lambda function package?

Actually the solution here was quite simple, although not obvious to non-Lambda experts.
As described in the question, the first step was to build the package library.
pip install --target ../package/python -r requirements.txt
However, when building the Lambda using sam build -u the same 'requirements.txt' file is used and the required dependencies were again being installed, this time as part of the app.
So all I had to do was remove the requirements that I wish packaged in a separate layer and rebuild. It does mean that I have to maintain 2x 'requirements.txt' but that is entirely manageable.
I've opened an issue and hopefully AWS will update their documentation.
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