How can I add a dynamic redirect on a 404 hit?

Try creating a custom event subscriber. If the page is 404, grab the original URL and redirect accordingly.

To do so, create a new module ("response_test" in this example), with the usual .info.yml and .module file.

Then register your event subscriber in the module's services file... (see EventSubscriber Example for a full example.

./response_test.services.yml

services:
    response_test.response_subscriber:
      class: Drupal\response_test\404RedirectResponseSubscriber
      tags:
        - { name: event_subscriber }

Then create a class to handle the event

./src/EventSubscriber/404RedirectResponseSubscriber.php

<?php 

namespace Drupal\response_test;

use Symfony\Component\HttpKernel\Event\FilterResponseEvent;
use Symfony\Component\HttpKernel\KernelEvents;
use Symfony\Component\HttpKernel\HttpKernelInterface;
use Symfony\Component\EventDispatcher\EventSubscriberInterface;
use Symfony\Component\HttpFoundation\RedirectResponse;


class 404RedirectResponseSubscriber implements EventSubscriberInterface {
  
  public function onRespond(FilterResponseEvent $event) {
    if ($event->getRequestType() !== HttpKernelInterface::MASTER_REQUEST) {
      return;
    }
    
    $response = $event->getResponse();
    if ($response->getStatusCode() == 404) {

      // Get the old path somehow
      // @see https://stackoverflow.com/q/11047305
      $oldPath = ''; // Try using $response->getUri() or $response->headers->get('location')

      
      // Manipulate the $oldPath to remove the last part
      // @see https://stackoverflow.com/a/51573313/5771750
      $redirectPath = dirname($oldPath);

      $new_response = new RedirectResponse($redirectPath );

      // Prepare a new Symfony\Component\HttpFoundation\Response and use
      $event->setResponse($new_response);

    }
  }
  
  public static function getSubscribedEvents() {
    $events[KernelEvents::RESPONSE][] = array('onRespond');
    return $events;
  }
  
}

Note: This answer is partly based of Clive's answer here: https://drupal.stackexchange.com/a/86622