This is working as designed.
We document what the "Limit User Registration" setting does within our documentation which can be referenced here:
To stop users from registering again using the same email address before activating the first registration, select Limit User Registration checkbox. For example, if a user uses [email protected] to register, they will receive an activation email. If the activation is not done, they cannot attempt to register again with the same email address. This prevents spammers or robots from sending multiple activation emails and fraudulent actions.
This is not a feature to limit a user from registering multiple times with the same email address.