Figured I'd update this from what I found from talking to O2, I always just got my phone upgrades paid monthly because it's 0% interest, figured it was pointless paying for it outright and I'd use some credit. When I've been into the O2 shop that's the way they pushed me down too so didn't think much of it.
I spoke to someone from O2 customer support to figure out what was going on, basically they give you a completely different set of options for the airtime which are vastly more expensive compared to SIM only. No free lunches I suppose and this may be industry standard, but I felt a bit ripped off.
Fortunately I can void my O2 contract by paying off what I owe on the phone and then switch to a vastly cheaper SIM only deal, from O2 or someone else, which is the plan when I get paid.
What I save will almost pay for half an iPhone, between now and when I would've paid off the device at my current rate.